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Why Gen Z, millennial savers face America's biggest retirement challenge, and how they can solve it

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For anyone entering the job market for the first time, retirement may feel more like a pipe dream than realistic goal. This is especially true for millennials and Generation Z (ages 18 to 23).

Saddled with student loans and credit card debt, these young Americans are hamstrung by the second recession in their lifetimes, wage stagnation and the aftermath of the 2008 financial crisis, according to a report from the Brookings Institute that outlines their financial challenges. Many of them also have another huge financial burden: caring for their young families as well as aging parents who are living well into their 80s and 90s. The aging of America means they will inherit wealth at later stages in their lives. 

Since the onset of the coronavirus pandemic, one in three millennials have fallen further into credit card debt. The sudden spike in unemployment, coupled with millions of younger Americans already living on just enough to get by, has forced many to turn to credit cards to afford necessities

According to a survey from Wells Fargo, two-thirds of workers with student loans say student debt is preventing them from saving for retirement. The effects are evident with 45% of millennials having less than $25,000 in personal savings. 

Acknowledge the challenges

Most know they need to save but need help getting over the initial hurdles, like how much to save and where to save. "They are a smart and optimistic generation." said Winnie Sun, co-founder and managing director of Sun Group Wealth Partners and a member of the CNBC Financial Advisor Council. "But they'll have more challenges. Luckily they have access to more information," she said.

Ted Rossman, an analyst at, said wage stagnation is hindering younger generations. "Adjusted for inflation, average hourly wages have barely budged in 50 years, but some major expenses such as housing and college have grown exponentially," said Rossman.

Some are dipping into their retirement accounts early: 38% dipped into their retirement accounts to fund unexpected expenses, according to a report by online investing firm Betterment. Early withdrawals can result in penalties and extra fees while also weakening compound interest growth

Explaining compound interest
Explaining compound interest

Retirement investing options 

Defined benefit pension plans used to be a mainstay for workers. With pension plans, employers managed the investments for employees who could expect a monthly payment after they retired for as long as the lived. 

But by 2017, only 18% of private-sector workers had access to a pension. Today, a majority of workers participate in contribution plans, primarily through 401(k)s, for which they need to have personal payroll deductions invested for their retirements. 

Employers often offer employees a matching contribution, meaning that the employer contributed to the employee's retirement fund up to a certain percentage of their income. Contributions made by employers are essentially free money for employees. 

Employees can save for retirement outside the context of an employer-sponsored 401(k), too. Individual retirement accounts or IRAs, are similar to a 401(k), but anyone can open one. Like a 401(k), you can contribute pre-tax money and select investments based on your risk tolerance and time horizon

Furthermore, Roth IRAs offer a way for workers to save and may have added tax benefits. Roth IRAs allow people to contribute money that has already been taxed. When they make withdrawals later in life, the withdrawals come out tax-free. Younger workers find the Roth IRA particularly attractive because younger people are likely in a lower tax bracket now than they will be later on. 

Gig workers, freelancers need to save

There are 6 million more gig workers today than a decade ago, according to a report by the ADP Research Institute.  

As millions continue to file for unemployment amid the fallout from Covid-19 pandemic, some companies are hiring more remote freelancers, according to a survey released by Upwork

However, gig work is notorious for its lack of benefits. Just 16% of independent workers have retirement savings. California recently passed a law forcing companies like Uber and Lyft ro reclassify their workers as employees, entitling them to benefits. 

Two ways to make money if you can't file for unemployment
How to make money if you can't file for unemployment

People who are self-employed have other savings options, including SEP IRAs or Solo 401(k)s. But workers won't receive any help and will most likely have to navigate these accounts without the expertise offered by some employers. 

Sun recommends that entrepreneurs and gig workers open Roth IRAs if they can. "They offer tax advantages but there are also no penalties if you withdraw contributions early and need to tap into some cash."

However, it is important to note that you could face penalties if you withdraw earnings early. 

The next sandwich generation 

Generation X is referred to as the "sandwich generation," caring for their children as well as aging parents. And as medical expenses continue to increase, this generation is feeling the squeeze. 

Gen Z faces a similar predicament. Advances in science and technology will prolong the life of their parents, while most will start families at a later stage in life compared to previous generations

Sun suggests that families have this discussion now. "Adult-aged children should talk to their parents about how they will care for them in future," she said. Sun also suggests that younger generations ask how much their parents can contribute to raising their children. The most important thing is to start the conversation, according to Sun. 

Fers about the U.S. social security system being doomed don't help instill confidence in young savers, but are another reason to take more control over long-term planning and investing. The latest estimates from the Social Security Administration project that funds will run dry by 2035. 

"While I don't think it will disappear, distributions will probably shrink. Younger generations can expect some Social Security, but it may be a hybrid of tax relief and income" Sun said. 

Unsurprisingly, baby boomers are the most confident they will receive some income from Social Security, with 83% counting on it. That number drops as generations get younger, with 64% of Generation X, 42% of millennials and just 38% of Gen Z planning to depend on the benefits. 

How much you can expect to get from Social Security if you make between $30,000 and $100,000