According to a recent survey, Generation Z is surprisingly confident when it comes to retirement.
According to Northwestern Mutual’s survey, not only do Zoomers believe they will retire by the age of 60 on average, but two in five of them expect to live to be 100. They also estimate they need just $1.2 million to fund that 40-year retirement, the lowest nest egg estimate among the four adult generations in the survey.
The study highlights a striking disconnect between Generation Z’s expectations and the reality of their retirement, and financial advisors say those who don’t adjust their outlook or preparation could be in for a rude awakening.
“It’s possible, but is the 20-year-old willing to make sacrifices today to ensure such a long retirement is possible?” Kashif Ahmed, president of American Private Wealth, told Yahoo Finance. “I’m pessimistic.”
But zoomers are not.
Despite having saved an average of $35,800 for retirement to date, nearly two-thirds of Gen Z expect to be “financially prepared for retirement.” Just 52% of retired Baby Boomers, 45% of Gen Xers, and 54% of Millennials were equally optimistic.
And Gen Z isn’t relying on Social Security to help them achieve their retirement dreams either.
The survey found that the generation expects the entitlement program to yield only 15% of their retirement income. By comparison, baby boomers expect this to cover almost 40% of their retirement funds, the report says.
The point that bothers financial planners is the total amount they think Gen Z needs to save — $1.2 million. For comparison, Americans in their 30s estimated they will need $1.44 million to retire, while those in their 50s projected an estimated $1.56 million. (People in their 40s appear to be more optimistic, with an estimate of $1.28 million, according to the report.)
“Yes, you can survive on $1.2 million, but what kind of lifestyle are you willing to agree to?” said Ahmed, noting that few Americans even manage to muster that much. “Not a comfortable thing.”
The story goes on
Asim Hafeez, who managed to achieve job option status in his 20s, said living on $1.2 million over four decades was unrealistic. For example, the owner of Empower Energy Solutions, a financial planning company, pointed out that such a number does not appear to take into account costs such as medical expenses, which inevitably increase with age.
“It seems to have been completely miscalculated. It’s definitely not enough,” he said. “If you’re older, the medical costs alone are likely to cost you more because your body is breaking down a bit. You may need extra care at some point.”
A recent analysis found that half of the 35 million people with traditional Medicare coverage spend at least 16% of their income on health care deductibles. Annually, they spent an average of $6,663 on insurance premiums and medical services. And Medicare doesn’t cover long-term care, which can be very expensive.
So how much money would it take for someone to live comfortably for 40 years in retirement?
Linda Farinola of Princeton Financial Group broke it down.
If someone wanted to live on $4,000 a month after taxes for 40 years — allowing for 3% inflation and a 6% return on invested retirement funds — they’d need about $4 million, she said.
“I don’t think they’re not fully aware of the cost of living and the impact of inflation over 40 years,” she said. “Just show them the math. It’s simple math.”
(Photo: Getty Creative)
Younger generations are often unaware of the costs of everyday living, said Perryman Financial Advisory’s Jen Grant. Many may still rely on their parents to cover expenses like phone bills and may be unaware of the other costs that come with age.
“I think there’s that point where they’re on the edge of adulthood and they start making money … but I don’t think they’re kind of fully immersed in some of the details of adult life,” she said. “If you think all I have to pay is rent, utilities and food, then that’s a different life than the rest of us who think, ‘I have property taxes to the county,’ and the older you get, the more more nuanced.” Finances are becoming.”
Still, there’s no need to completely burst the Gen Z retirement bubble, these experts say. If you really want to retire at 60 and plan for 40 golden years after that, all you have to do is be realistic about achieving your retirement goals.
For example, Gen Z should meet with a financial advisor and work out a plan tailored to their individual needs, said Aditi Javeri Gokhale, chief strategy officer, head of institutional investments and president of retail investments at Northwestern Mutual.
(Photo: Getty Creative)
The Northwestern Mutual study found that “Individuals who identify as disciplined financial planners cut their retirement age by two years,” while “non-planners add two years.”
Gokhale claimed that a planner could help Gen Z achieve goals such as getting married and starting a family, getting their children to school, and eventually retirement.
“So it’s going to be five years, 10 years, 20 years and then retirement. So to think about it, you have to start setting goals and planning,” she said. “And that’s how you start talking about short-term goals and retirement goals.”
Beyond saving in a traditional or Roth IRA and a 401(k), Hafeez recommended that Gen Z consider other investments, such as real estate, that offer cash flow.
“The holy grail of retirement is to focus on monthly cash flow, which can also be adjusted for inflation over time,” he said.
Ahmed, meanwhile, emphasized that there is no getting around hard work, diligent saving and proactive planning for the best retirement.
“I always tell my own kids to watch out for the squirrels in late summer and early fall. They’re super busy grabbing all the nuts and whatever they want to put away,” he said. “Because they know winter is coming…Winter is your retirement and you need to start saving for it now.”
Dylan Croll is a Yahoo Finance reporter.
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