Gen Z is doing better financially than Baby Boomers at their age and saving for retirement

Evidence is mounting that Gen Z is on a fiscally sound path, at least when it comes to personal finances.

Thanks largely to a tight job market, the typical 25-year-old member of Gen Z — those born between 1997 and 2012 — has a household income of more than $40,000. That’s more than 50% above the growth of babies of a comparable age, according to a recent Economist article on the generation.

Gen Z is also saving relatively well for retirement. Vanguard reported last year that all generations increased their participation rates in 401(k)s, but Gen Z saw the biggest jump. Thirty percent of workers aged 18 to 24 participated in their employer’s 401(k) plan in 2006. The participation rate increased to 62% in 2021.

“Automatic enrollment and target-date fund growth are reshaping retirement planning behavior for all generations, but those innovations are having the biggest impact on the youngest workers: millennials and Gen Z,” according to the Vanguard general study. .

I’d like to see even higher retirement savings participation rates among Gen Z, of course. Looking ahead, the numbers should improve as new 401(k) plans must automatically enroll employees with a minimum contribution of 3% of annual salary starting in 2025. Contributions will automatically increase by 1% per year until they reach a 10% or 15% savings target. (The real need is to bring anyone who works for an employer that doesn’t offer a retirement plan a low-cost, well-diversified retirement savings option with auto-enrollment and target-date funds.)

Young people saving for retirement are using one of the simplest and scariest tools in finance: the power of compounding. Founding Father Benjamin Franklin, always good for a detailed overview, captured the essence of the mix: “Money makes money,” he wrote. “And money that makes money, makes money.”

Take this simplified example. Let’s say your investments return 6% per year, and you invest $10,000. If you earn 6% on a $10,000 investment, you’ll make $600 the first year. The second year starts at $10,600. By year 20, your balance will have grown by more than 200%. Plus, in an employer-based plan, you make regular contributions through payroll deduction and receive a matching employer contribution.

The mixing process seems slow at first. The longer the savings compounds, the better. For the typical 25-year-old, assuming a target retirement age of 65, 40 years is plenty of time to compound to work the math. Compounding is one reason investing diligently over the long term pays off eventually.

Chris Farrell is Senior Economics Fellow, Marketplace; commentator, Minnesota Public Radio.