Gen Z 401(k) Mistakes That Cost Thousands in Future Retirement
Young workers are making costly mistakes with their 401(k) plans. Many don’t save enough or make poor investment choices, which can cost Gen Z thousands in future retirement savings.
Not Contributing Enough for the Employer Match
Many companies match your 401(k) contributions. This is basically “free money!” Yet many Gen Z workers don’t put in enough to get the full match. If your employer offers to match 5% of your pay, but you only save 3%, you will miss out on the other 2%.
“The biggest mistake I see among Gen Z is not taking full advantage of employer 401(k) matches—it’s literally leaving money on the table,” says Michael Norton, Senior Vice President of Investments. “Starting early, even with small contributions, can translate to hundreds of thousands in additional retirement savings over time.”
Let’s look at the numbers:
If you make $50,000 a year and your employer matches 5%, that’s $2,500 each year. Over 40 years, that could grow to over $500,000 with investment returns!
Not Starting Early Enough
Time is your biggest ally when saving for retirement. Many Gen Z workers put off their 401(k) contributions; retirement seems such a long way off or they want to pay off student loans first.
But waiting even 5 years can cost you hundreds of thousands of dollars. The power of compound interest means early dollars are your most valuable dollars.
Keeping Money in Cash or Default Options
Some Gen Z workers leave their 401k money in cash or money market funds. Others never change from the default investment option. This is like driving with the parking brake on!
Long-term retirement money should be invested and working for you, especially when you’re young. You have time to ride out market ups and downs. An overly conservative portfolio could possibly cost you as much as 3% to 5% in returns each year. That adds up to hundreds of thousands of dollars by retirement age.
Taking Money Out Early
Recent data found 41.4% of young workers cash out their 401 (k) when changing jobs.
This is one of the worst financial moves you can make!
When you cash out early:
- You pay income tax on the money
- You pay a 10% penalty if you’re under 59.
- You lose decades of tax-free growth
A $5,000 cash-out at age 25 could cost you $75,000 or more in retirement money.
Not Increasing Contributions with Raises
The 401k contribution shouldn’t be “set once and forget.” Increase the 401 (k) contribution every time you get a raise.
If you get a 3% raise, try to put 1% more into your 401k. You’ll still have more take-home pay, and your retirement savings will grow faster.
This painless strategy can add hundreds of thousands to your retirement nest egg.
Setting Unrealistic Goals
Some Gen Z workers don’t know how much they should save for retirement. Without a clear goal, it’s hard to stay motivated.
A good starting point: aim to save 15% of your income for retirement. This includes your contributions and any employer match.
Use online retirement calculators to set realistic targets based on your age and lifestyle goals.
What You Can Do Today
- Check if your employer offers a 401(k) match
- Contribute at least enough to get the full match
- Choose investment options suited for your age
- Increase your contributions with each raise
- Set up automatic contribution increases
- Use retirement calculators to set realistic goals
Small changes today can mean a much more secure future. The best time to improve your 401k strategy is right now!
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.