Millennial and Gen Z Workers Aren't Saving Enough for Retirement—Here Are 3 Tips to Get on Track

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Some of the youngest employees in the workforce may not be saving enough to retire comfortably.

Millennial and Gen Z employees under 35 currently have an average of $37,211 and $6,264, respectively, saved in their 401(k) retirement plans, according to a new report released by Vanguard, an investment firm that represents more than 30 million investors.

However, with an average total savings rate of 10.5% for workers ages 25 to 34 and 8% for workers under 25, these employees likely aren't saving enough to meet their retirement goals.

"We believe participants need to reach a total saving rate of 12% to 15%" says John James, managing director of Vanguard's institutional investor group.

Here are the average and median 401(k) account balances by age in 2021, for Vanguard retirement plans:

The average balances are much higher because they represent the sum of all of Vanguard's account balances divided by the total number of accounts, so a few outliers can skew the results.

The median, on the other hand, is the middle point, so half of the account balances are higher and half are lower. Because of this, the median is considered to be more representative of how much most people have saved in their 401(k) accounts.

Many factors influence employee retirement contributions, including income, age and how long an employee has been working. Older employees with more experience tend to have higher account balances compared to younger ones who are just beginning their careers.

Some good news: Retirement plan contributions reached a record high last year, according to Vanguard. The investment firm attributes this trend to the increasing usage of automated features, such as automatic enrollment and automatic annual contribution increases.

Although the "set and forget" option has considerably boosted employees' retirement contributions, Vanguard still believes "there is more we can be doing to help participants achieve financial wellbeing — to have the confidence that short-term spending needs won't stop them from reaching their long-term retirement goals."

How to get your retirement savings on track

For those who feel behind on saving for retirement, it's not too late.

Here are three tips for boosting your contributions, from Nilay Gandhi, senior wealth advisor at Vanguard.

1. Don't focus on your account balance

"While it may be tempting to focus on your account balance, account balances are heavily influenced by market performance," Gandhi says. "If you focus too much on your account balance, you may be tempted to react to short-term volatility at the expense of your long-term financial goals."

Instead, remember that "market volatility is a normal and expected occurrence." Gandhi encourages investors to concentrate on what they can control, such as their current savings rates, investment choices, expenses and long-term goals.

2. Contribute what you can

How much money you're able to save is "one of the most influential factors in helping you achieve your long-term financial goals," Gandhi says.

However, Gandhi acknowledges that it may seem daunting for employees who are just beginning their careers to save the recommended 12% to 15% of their salary.

It's OK to start with what you can afford. But, "be sure to save at least enough to get your employer's full match," Gandhi says. From there, "increase your savings rate by 1% to 2% each year until you achieve the target savings rate of 12% to 15%."

3. Consider a Roth IRA

If you're looking for additional ways to save, Gandhi suggests opening a Roth IRA, which is another type of tax-advantaged retirement account.

One of the main differences between a 401(k) and a Roth IRA is how they are taxed. With a 401(k), contributions are deducted from your paycheck and deposited before your income is taxed. When you withdraw the money in retirement, those withdrawals are taxed at your current tax rate.

With a Roth IRA, you're investing money that has already been taxed. While you're not able to deduct those contributions from current taxable income, withdrawals made after you turn 59½ aren't taxed.

For 2022, most investors can contribute up to $6,000.

But be mindful of income limits, Gandhi says. Single filers can only make contributions to a Roth IRA if they earn less than $129,000, and the limit is $204,000 for married couples filing jointly.

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