Millennials and Gen Z are outpacing their elders when it comes to putting money toward the future—as they are afraid of a future where they cannot afford to retire.
- On Tuesday, Bank of America released its Q2 2023 Participant Pulse report, showing that younger generations are now contributing more to their 401(k)s than older generations.
- The report found Americans’ average 401(k) balances have increased 10% to $7,250 since last year.
- An analysis of 4 million workers found that the younger workers were leading the improvement, with 19.5% of Gen Z upping contributions and 11% of millennials.
- Only 9.7% of Gen X and 7.8% of Baby Boomers increased their contributions.
- Unfortunately, a growing percentage of workers have begun withdrawing “hardship distributions,” with 36% more people pulling from retirement accounts than last year.
Why It’s Important
Millennials and Gen Z have long been understood to be very different generations from their predecessors. Older generations have looked upon them as being lazy, entitled, and incapable of handling simple tasks without being micromanaged. Younger employees similarly do not understand their elders—viewing them as workaholics who put too much of their life, energy, and meaning into their work.
Younger generations have also struggled with attaining the financial independence of prior generations. Beset with multiple recessions, a pandemic, a poor housing market, a high cost of living, trillions of dollars in student loan debt, and the promise of lower job prospects and less prosperous futures than their parents, many young people have been demoralized by the workforce.
The possibility of a happy retirement to them seems like a hollow promise. As a result, many young people are scraping by and pouring more money into their 401(k) contributions, knowing that they will need more money than their parents to survive and will likely be unable to rely on services like social security when they reach retirement age.
This change is a curious but pleasant surprise for financial planners, who argue that this is good news for young people. Older generations usually outpace younger ones in their contributions, but this scrambling has advantages for young people as compounding interest gradually builds up. The younger a person starts contributing to their 401(k), the larger their savings will be by the time they retire, Fortune notes.
“[Compound interest has] the potential to magnify regrets about foregone savings over time as a ‘what could have been’ realization becomes more stark. At a modest 6.5% annual return, every dollar you put away in your twenties becomes $17 by the time you retire,” says Bankrate analyst Greg McBride.