6 Unique Retirement Savings Strategies to Help Millennials and Gen Z Reach Their Ambitious Goals
Millennials and Gen Z have surely faced their fair share of challenges. Amidst recessions that crippled their wealth-building years, a housing market that continues to price them out, and insufficient wage growth that just can’t quite manage to keep up with inflation—members of the younger generations have their work cut out for them.
But they also have incredible opportunities that no other generation has had access to. They can hop online and apply for a remote job that can double or triple their salary overnight. They have limitless options to build a lucrative side hustle. They have an abundance of information at their fingertips so that anyone can become an expert in anything.
These are no small advantages when it comes to building wealth. And even though Millennials and Gen Z may face obstacles that feel insurmountable at times, these generations are tenacious. They’re outspoken and they go for what they want. And they are not afraid to get messy and creative to solve the problems placed before them.
When it comes to building wealth in today’s economic landscape, this is just another problem they have to solve. And fortunately, I think there are creative solutions that are going to help them come out ahead.
Millennials and Gen Z Have Unique Needs and Challenges
Millennials and Gen Z are facing unique challenges when it comes to saving for retirement such as longer life expectancies and higher healthcare costs. This means that not only will they need to fund a retirement that lasts for 30—possibly even 40—years, but they’ll need to account for the fact that that retirement may be more expensive.
And while their expenses may be higher, they’re also facing the real possibility that they won’t be able to meaningfully supplement their retirement income with Social Security benefits—nor will they be likely to receive employer support from company pension/defined benefit plans.
Instead, the onus of saving will be entirely on their own shoulders.
Plus, market conditions today are a far cry from those that their parents and grandparents enjoyed. The Baby Boomers generally saw markets climbing through the 80s and 90s, while Millennials have already lived through two recessions that severely impacted their earning potential and ability to start building wealth early.
Gen Z, while originally poised to inherit a strong economy as they entered the workforce, have so far fared similarly to Millennials. Unfortunately, their early career prospects and some of their most critical wealth-building years were hit hard by the Coronavirus pandemic.
Millennials and Gen Z Also Have Ambitious Goals
Yet despite these challenges, younger generations have ambitious goals for their retirement plans. In fact, most of them want to retire early.
Northwestern Mutual’s 2022 Planning and Progress Study found that, on average, members of Gen Z expect to retire at age 59, while Millennials expect to retire at age 61. These expected retirement ages are quite a bit younger than Gen Xers and Baby Boomers, who expect to retire at ages 65 and 71 respectively.
While Millennials and Gen Z may have their work cut out for them, they’re remaining incredibly optimistic. But to overcome their challenges and meet their visionary goals, they won’t be able to rely on the same saving and investing strategies that the generations before them used to build wealth.
Instead, they’re going to have to get creative so they can save more money on a shorter timeline.
Retirement Savings Strategies for Millennials and Gen Z
While I’m a member of the Baby Boomer generation, I can certainly empathize with the challenges younger generations are grappling with. And I believe my own wealth-building journey—which has been quite a bit different than many of my peers—can shed valuable insight on the moves Millennials and Gen Zers need to make to reach their retirement goals.
Below, I’m sharing how I would approach my retirement savings strategies if I were in my 20s or 30s and facing the economic realities of today. While some of these steps may feel as if they’re out of reach for members of younger generations at the present moment, taking small steps today has the potential to result in exceptional outcomes.
Use an online budget system to track your spending
Start saving for retirement now (even if it’s just a little bit)
Contribute to a Roth IRA
Take ownership of your retirement savings
Prioritize income replacement over asset appreciation
Become a self-directed investor
1. Use an Online Budget System
As digital natives, Millennials and Gen Z don’t typically carry cash, relying instead on debit/credit cards or even digital wallets. While this is fine, you need some way to stay conscious of your spending habits so you can be strategic about how much you save for retirement. Mindlessly swiping the card or scanning the chip without realizing how much you’re actually spending is a good way to torpedo your savings goals.
Budgeting apps like You Need a Budget (YNAB) can pull in transactions automatically and allow you to make simple yet strategic plans with your money. In fact, hands-on, comprehensive budgeting apps may even help you to be more aware of your spending habits than your parents and grandparents were at your age.
Once you’re keenly aware of your expenses and your savings rates, you’re in a better position to make more informed decisions with your money. If you want to ramp up your savings, you know which expense categories to cut back on. If you’ve already cut back on your expenses and still aren’t meeting your savings goals, you know it’s time to increase your income.
2. Start Saving for Retirement Now
The greatest advantage you have as a young investor is time. This is because of the power of compound interest. When you invest your money, you earn interest on it. That interest then earns interest on itself and is compounded monthly. The more interest you earn, the more your money grows—exponentially.
The Power of Compound Interest
Here’s an example to illustrate. Let’s say you start stashing $100 a month under your mattress when you’re 18. Since you’re a Gen Zer, you plan to retire at the ripe old age of 59 (this gives you 41 years to save). After 41 years of saving $100 a month, you’d only have $49,200. (Dismal!)
But if you invested that money, it would have the potential to earn compound interest. After 41 years, you’d have more than $280,000 by the time you turned 59 (assuming an average 7% return rate compounded monthly). That’s more than five times what you’d be able to save in a non-interest-bearing savings account (or under your mattress) without increasing your savings rate by even a penny.
Now, $280,000 probably won’t be enough for you to retire on. But the good news is that you’ll likely be able to save much more than $100 a month as time goes on. You may receive employer-matching contributions, you’ll likely increase your earning potential, and you may even find creative ways to earn more income as you get older.
The point remains—you don’t have time to waste when it comes to investing. Take advantage of your greatest resource and start investing now, no matter how big or small your monthly savings rate.
3. Contribute to a Roth IRA
Next, younger generations may want to consider the benefits of a Roth IRA. A traditional IRA allows you to fully or partially deduct your annual contributions from your taxable income, potentially decreasing your tax liability for the year. Taxes will then be due on withdrawals you take from the account in retirement.
A Roth IRA, on the other hand, is funded with after-tax contributions. While there won’t be any current-year tax benefits, the money you contribute can then grow tax-free for decades. Even better, you can withdraw those contributions and earnings tax-free and penalty-free after you turn 59½ (as long as the Roth IRA has been open for more than five years).
Roth IRAs are great for young investors because it’s likely that you haven’t reached your full earning potential yet. This means you’re probably enjoying the lowest tax bracket you’ll ever be in. Therefore, it’s better to contribute after-tax dollars now which can then be withdrawn tax-free later when you’re in a higher tax bracket.
4. Take Ownership of Your Retirement Savings
Millennials and Gen Zers have a reputation for job-hopping—and even career-hopping! It’s no wonder, as job-hopping can result in a doubling or tripling of your salary overnight. But because you likely won’t spend 40 years working for the same employer as your parents or grandparents might have, you need a plan to fully own your retirement savings.
Have a Strategy for Your Company Plans
If you work for multiple employers who provide you with 401(k) Plans, you won’t be able to continue contributing to those same Plans when you leave one job for another. Of course, any money you contribute will follow you—as well as any employer contributions that have vested, but the Plans themselves will not.
This means that if you’re not careful, you might end up with a multitude of 401(k) Plans that are disorganized and chaotic. It will be difficult to create an aligned investment strategy when you’re hopping from one account to another. Therefore, you’ll want to ensure you have a plan to organize or roll over your 401(k) Plans so that you don’t have multiple Plans to keep track of.
Open a Solo 401(k)
Additionally, you may want to consider opening a solo 401(k) if possible—in addition to any employer-sponsored 401(k) Plans you have—so you can continue contributing to your retirement consistently no matter what your job is or who you work for. To become eligible for a solo 401(K), all you have to do is earn some level of self-employment income.
This is such a great option for younger generations because many of you already earn some form of self-employment income from a side hustle. Side hustle opportunities are limitless: You could drive for a delivery service like DoorDash, shovel snow for neighbors in the winter, run a blogging website, review products on YouTube, rent out your car, walk dogs, or do any number of things.
The only rules that apply are that you can only contribute your earnings from self-employment activities and you can’t have any W-2 employees of your own. If you meet these criteria, this is an excellent way to build your retirement savings consistently.
Even better, a solo 401(k) provides you with investment options that are well beyond the bounds of an employer-sponsored 401(k) Plan. In employer-sponsored Plans, you’re limited by what’s available in the Plan, which typically includes mutual funds consisting of stocks and bonds.
With a solo 401(k), you have the freedom to invest in any stocks, bonds, mutual funds, ETFs, and index funds you please, as well as alternative assets like cryptocurrency, real estate, and more. You can get really strategic and sophisticated with the investments inside a solo 401(k).
5. Prioritize Income Replacement Over Asset Appreciation
This brings me to what is probably going to be the most important strategy for Millennial and Gen Z investors: income replacement.
Because of the challenges you’re facing, you need a way to generate more reliable income for your retirement without having to save a gargantuan nest egg—we’re likely talking multiple millions of dollars—that will provide income purely through returns made from a volatile and unpredictable market.
This is the importance of income replacement. Income-replacement assets provide consistent, predictable income in addition to appreciating over time. One of the most common income replacement assets is real estate. In simple terms, an investor purchases a property and then earns consistent income from it in the form of rental payments.
(Here’s how young investors can start building their real estate portfolios in their 20s and 30s!)
While income-replacement assets aren’t without risk, they often provide better returns than what you can expect from long-term investments in stocks and bonds. Furthermore, the income is more predictable and is less susceptible to market fluctuations, making it easier to develop concrete retirement plans.
6. Become a Self-Directed Investor
Whether you open a solo 401(k) or an IRA (either traditional, Roth, or both), you can then engage in self-directed investing. Self-directed investing allows you to use your tax-advantaged retirement contributions to invest in alternative assets—not just stocks and bonds. Some of the most common income-producing alternative assets include:
Residential real estate
Equipment leasing
Commercial real estate
The beauty of self-directed investing is that you can invest your money in projects you have a deep understanding of. In today’s world, you can become an expert in any of the alternative asset classes and use your expertise to build the future of your dreams.
How Chicago Trust Administration Services Can Help Young Investors
As a self-directed investor, the onus is on you to ensure that you’re fully vetting your investment opportunities and following IRS regulations in how you complete, use, and manage the investments in your self-directed portfolio.
Because these regulations are governed by incredibly complex tax laws, the IRA requires that most self-directed plans are managed by a professional custodian. At Chicago Trust Administration Services, we provide management and administration for both self-directed IRAs and self-directed solo 401(k)s.
While we do not provide investment advice, sell investment products, or evaluate the legitimacy and quality of specific investment opportunities, we do help you ensure the transactions you make are IRS-compliant.
As a young investor, we know you probably have questions about what it takes to become a self-directed investor. To see how we can help you get started on your self-directed investing journey, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.