Where Each Generation Is Putting Their Retirement Savings — Beyond 401(k) Plans
Written by
Marc Guberti
Edited by
Zuri Anderson
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Although 401(k) plans are one of the most popular retirement vehicles, people can still save for retirement after maxing out their annual contributions. Savings accounts, IRAs, brokerage accounts, and health savings accounts are the four most popular options, according to a Schwab study conducted last year.
Most people store money in their savings accounts, while fewer people across all generations are as willing to invest in IRAs, brokerage accounts, and HSAs. It reflects a desire to play it safe with money, but that objective can result in missed opportunities.
Keeping Too Much Money in Your Savings Account Is Risky
While savings accounts are touted as financial products that minimize risk, relying on them too much can hurt later down the road. Jason Dall’Acqua, certified financial planner (CFP), founder and financial advisor at Crest Wealth Advisors, explains how most people’s emphasis on savings accounts can position them poorly for retirement.
“A savings account will not help your money grow substantially over time, given the low rate of interest these types of accounts pay. Therefore, putting too much into a savings account comes with an opportunity cost of lost growth potential. Your money needs the opportunity to work for you over time through compounding,” Dall’Acqua said.
The Schwab Study found that more than 60% of people put money in their savings accounts across every generation, with far fewer people putting money into IRAs, brokerage accounts and HSAs. While it’s good to have enough money to cover emergency expenses, and many people recommend saving six to 12 months of living expenses, you shouldn’t put every dollar in your savings account after maxing out your 401(k) contributions.
Invest Based on Your Risk Tolerance
Each person’s financial situation is different, and you can use risk tolerance to assess how much you should invest in stocks and other growth-oriented assets. Dall’Acqua views age as a key part of determining risk tolerance, but said there are other factors involved.
“Your investment allocation is going to be dependent on your risk tolerance, risk capacity and investment time horizon. Someone in their 20s or 30s who has a long investment horizon can afford to take more risk and invest more aggressively in stocks, giving their money the best opportunity for growth,” Dall’Acqua said.
“Someone in their 60s a few years out from retirement will have a different investment horizon and risk tolerance since they may be relying on their investments for income within a few years.”
The Schwab Study found that Gen Z is the least active with IRAs and brokerage accounts. That gives them a disadvantage during their youngest years, which should be associated with higher risk taking, as long as it isn’t speculative in nature.
Other Investment Opportunities
Most people focus on their 401(k) plans and savings accounts, but there are other opportunities to put your money to work. Dall’Acqua outlined some of the most common options.
“There are numerous options for where one can save beyond their 401(k). A brokerage account, IRA, Roth IRA, or real estate are just a few options of additional places to put your money,” Dall’Acqua said. “You should aim to diversify the types of accounts you save money into such as pre-tax, Roth and taxable to take advantage of both current and future tax planning opportunities. Doing so will also provide you with income and tax planning flexibility in retirement.”
Using these different investments and adjusting them based on your risk tolerance can help you stay ahead of inflation and end up with a smooth retirement.
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