Young workers are relying on more than their 401(k) plans to save for retirement, as other types of investments are playing a greater role in their long-term wealth plans, according a Schwab Retirement Plan Services study.
“Younger workers are optimistic about reaching financial security and hope to retire early, “said Nathan Voris, director of investments, insights and consultant services at Schwab Retirement Plan Services, as he shared some of the highlights of the annual nationwide survey of 401(k) plan participants. “They want a range of investment choices and personalized advice to help them meet their financial goals.”
Gen Z and millennials are more likely to want a broader range of assets in their 401(k), not just bonds and traditional equities but also annuities, ESG options, fractional shares and crypto, added Voris. Even at a young age, Gen Z and millennials see that saving for healthcare expenses in retirement is crucial too, he added. And about half of Gen Z and millennial workers are using Health Savings Accounts to save and invest for health-care costs in retirement.
Only 37% of Gen Z workers say their first investing experience was through a 401(k), a lower proportion than millennials (54%), Gen X (61%) and Boomers (61%).
Instead, many Gen Z workers first got involved in investing through:
Mobile trading (22%)
Traditional brokerage accounts (10%)
Health savings accounts (9%)
Young workers want more choices
In the past year, many Gen Z (38%) and millennial (27%) workers changed employers and they have had the opportunity to take a fresh look at how they are saving and investing. Young workers say they want a wider range of investment options and vehicles.
According to the survey, more than 4 in 10 Gen Z and millennial workers wish they could invest in annuities and cryptocurrency in their 401(k). More than a third of them wish they could select ESG investments, and nearly as many say they’re interested in fractional shares. Also, more than 7 in 10 younger workers say it’s important that their 401(k) investments reflect their personal values.
About half of all employees (48%) who are offered a health savings account (HSA) by their employer are using it, primarily to pay current healthcare expenses.
About half of Gen Z (52%) and millennial (48%) workers are also using their HSAs to save for future healthcare costs in retirement, and more than half are investing their HSAs in mutual funds and other types of investments.
Rising costs and market volatility continue to cause concern for all workers, but Gen Z and millennial workers are more likely than older workers to cite unexpected expenses, education costs, and supporting family members as obstacles to saving for retirement, the survey said.
Still, younger workers are staying optimistic and intend to retire early into an active lifestyle that includes enjoying life, travel, and spending time with family. Gen Z wants to retire at 60 and millennials at 62, compared to 64 and 67 for Gen X and boomers. More than 90% of younger workers say they are very or somewhat likely to achieve their retirement savings goals.
Gen Z thinks they need to save $1.4 million for retirement while millennials estimate $1.8 million, and all generations think their savings will last about the same amount of time.
Gen Z and boomers estimate having enough for 25 years, while millennials and Gen X say 22 years. However, more than a quarter of Gen Z workers don’t know how much they will need in monthly income to live comfortably in retirement.
Casting wide net for advice
Younger generations are more open to financial wellness tools, including online tools to help save for retirement, build an emergency savings fund, and manage debt. They are also open to help from a financial professional to develop a plan and stay on track, the survey said.
In fact, Gen Z (83%) and millennials (82%) see more need for personalized advice for their 401(k) than Gen X (79%) and boomers (67%).
Younger workers prefer human over computer-generated advice but are very likely to utilize both, while boomers are less likely to follow both human and computer-generated advice.
Gen Z (24%) and millennials (20%) are more likely to use social media for financial advice than Gen X (14%) and boomers (2%). In addition, over a third seek advice from family and friends (40% and 35% for Gen Z and millennials versus 24% and 16% for Gen X and boomers).
Nearly half of Gen Z and millennials want help in calculating how much money they need to save for retirement. Other areas of interest include receiving 401(k) investment advice, determining retirement age, and managing expenses.
Helping Gen Z and millennial workers
Some Gen Z and millennial workers might find it difficult to cut a clear path to financial security, faced with access to more investment choices, virtual education and online tools.
As Voris pointed out, workers have a variety of investment options, tools and resources to tap into when building their retirement portfolios, but the range of choices can become overwhelming, especially for those just starting out. Financial professionals can help younger workers identify their top priorities and areas of interest.
“One of the most valuable things financial professionals do is to provide young workers with realistic, achievable next steps that help them get and stay on track,” he said. “For many Gen Z and millennial workers, this may include building an emergency savings fund and paying down debt. Younger workers tell us they are very open to help from a variety of sources, especially human advice; so, we’re hopeful that with some guidance, this highly engaged group will reach their goals.”
The online survey of U.S. 401(k) participants was conducted by Logica Research for Schwab Retirement Plan Services, Inc. A total of 1,000 plan participants completed the survey. Respondents participated in the study between April 4 and April 19, 2022.
Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected].