Planning for retirement probably isn't top of mind for most people in their early 20s. Many have massive student loan balances to pay down while they're just starting to establish their independence.
But that doesn't stop the majority of Gen Z from thinking they'll be financially ready to retire when the time comes. What's more, they expect they'll be ready to retire at an earlier age than older generations. That's according to a recent survey by Northwestern Mutual.
Image source: Getty Images.
Should Gen Z be so confident? Maybe. Certainly, some should be. (Specifically, the ones reading this article.) But the following chart suggests that Gen Z members, as a whole, are probably overconfident in their ability to retire when they want.
The 1 chart Gen Z must see
Take a look at the following chart.
Data source: Northwestern Mutual. Chart by author.
The pattern is clear. Younger folks tend to be confident that they'll be okay in retirement. As the end of your career approaches, though, that confidence takes a hit.
Why that's the case could be for any number of reasons. Perhaps you procrastinated and didn't start saving until your 30s. The effect of 10 extra years of retirement savings compounded over the next 30 years is absolutely massive.
Perhaps stock market returns weren't as strong as you thought they'd be. Not every decade will be like the 2010s. Even the crash of 2020 was buoyed by massive returns from April through December. Investors under 35 probably didn't see a sustained market pullback during their investing careers until 2022.
Perhaps you realize you'll need more for retirement than you originally planned. As life happens, plans change. Inflation happens. Social Security might not seem as secure.
There are a lot of reasons why people can become less confident in their ability to retire as they age. But the closer you get to something, the more realistic your outlook on it is. It's easier to predict where you'll be in four years than in 40 years. So the lower confidence of Gen X and boomers should at least give Gen Z some pause.
Stay optimistic, but temper it with some pessimism
I love the optimism of Gen Z.
Saving for retirement requires optimism. Optimistic people make good long-term investors.
Instead of stashing all their money under a metaphorical mattress, optimistic people aren't afraid to take on a little risk to grow their wealth. Instead of selling everything when the market nosedives, optimistic people buy more. Ultimately, that behavior leads to stronger returns than average.
But a certain amount of pessimism can actually be beneficial. Pessimists worry about how stable their jobs and careers are. They worry about whether Social Security will be there when they need it. And they worry that they aren't saving enough for retirement as a result.
Author Morgan Housel has some timeless advice for anyone planning for retirement: "Save like a pessimist and invest like an optimist." In other words, save as much as you can when you can, but invest aggressively.
Gen Z's biggest advantage over older generations when it comes to planning for retirement is time. Saving as much as you can today and investing it in the stock market for 40 years can produce phenomenal wealth -- certainly enough to ensure you can retire on your terms. Perhaps, even, to retire early.
While you might think you're well on your way to saving enough to retire, it never hurts to check your math and pad the numbers. Over time you'll gain a clearer picture of where you are on the path, and you can course correct if need be.
Stay optimistic, but include a good dose of pessimism.
