The strengths and weaknesses of 4 generations of retirement savers

February 26, 2024 8:00 AM

America's four biggest generations face different challenges as they navigate their way to retirement.

The difference between generations is often measured in music, manners and technology. But it can also be measured in retirement savings.

For years, studies have shown that baby boomers, Generation X, millennials and Generation Z are moving at very different speeds in the race to a secure retirement. Gen Zers, born well into the age of the 401(k), have had a leg up on their predecessors thanks to auto-enrollment and other default features in their retirement plans. To a lesser extent, the same has been true of millennials.

Gen Xers — caught in the middle, as always — came of age during America's bumpy transition from pensions to 401(k)s and missed out on many of those default features. Boomers, meanwhile, have had to contend with their own set of challenges, including the Great Recession — which happened at just the wrong time for many of them, during their peak earning years.

How do we know all this? Because groups like Vanguard, Prudential and the Center for Retirement Research at Boston College have all published groundbreaking research on these topics. Some of those studies informed Financial Planning's new cover story on how to advise each generation for retirement.

And we've been covering this research in real time, as it's come out. Here's a look back at some of the most informative and surprising studies we've seen in recent years, each one shedding more light on America's many retirement generation gaps:

Gen Z zooms past its elders

In April 2023, the financial services giant Vanguard discovered something interesting about Gen Zers: They were building up their retirement savings much faster than their predecessors.

In 2021, 62% of Gen Z workers — defined as those aged 18 to 24 — participated in a workplace retirement plan, according to Vanguard's study. That's more than twice the rate of the same age group in 2006, when only 30% participated.

What could explain this jump? In Vanguard's view, the clear answer is auto-enrollment. This feature, which defaults workers into enrolling in their retirement plans and then gives them the option to unenroll, has been found to dramatically increase participation. According to one previous Vanguard study, this default more than tripled the number of new hires who signed up for their plans — from 28% to 91%.

And that innovation has greatly benefited Generation Z, which has been coming of age just as auto-enrollment is growing more common. In 2006, Congress passed the Pension Protection Act, which gave employers the authority to default workers into their retirement plans. At that time, only 11% of 401(k)s featured auto-enrollment, according to Vanguard. By the end of 2021, 50% did.

"It really is attributed to the fact that they are being increasingly defaulted into participating in the plan," said Dave Stinnett, head of strategic retirement consulting at Vanguard.

But is that the only reason? Could there also be something about Gen Zers themselves that makes them better savers? Some wealth managers think so. Andre Jean-Pierre, the founder of Aces Advisors in New York, estimates he has over 80 Gen Z clients — and "as a whole," he notices a difference.

"I wouldn't call them sophisticated investors, but they are farther ahead of millennials" at the start of their careers, Jean-Pierre said. "They have more exposure to financial markets, whether it be through the news or social media. They understand it better."

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Are millennials better savers than boomers?

Gen Zers aren't the only generation to benefit from default 401(k) features. Millennials have reaped the rewards as well — so much so that, according to another Vanguard study, they may retire in more comfort than their baby boomer parents.

In that study, Vanguard found that median-income "early millennials" — defined as those currently aged 37 to 41 — are on track to replace 58% of their preretirement earnings, while median-income "late boomers" — defined as those aged 61 to 65 — will only be able to regenerate 50%.

How is this possible? After all, the Americans born after World War II are currently far wealthier than their children. According to the Federal Reserve, boomers own 52.8% of the United States' total household wealth — almost 10 times as much as the 5.7% owned by millennials.

And yet, like Generation Z, millennials do have one significant advantage: They often make better investment decisions automatically, thanks to 401(k) features like auto-enrollment and auto-escalation.

"We've seen a number of policy innovations that have expanded access to retirement plans," said Fiona Greig, one of the study's co-authors. "So the share of workers who have access to a retirement plan and participate in those plans has been increasing over decades."

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Generation X isn’t counting on the Great Wealth Transfer

Generation Xers often feel left out or left behind. And according to some research, this is largely true of their retirement savings.

A 2023 study by the insurance company Prudential found that 35% of Gen Xers said they had less than $10,000 in retirement savings. Even worse, 18% had no savings at all.

One might expect an inheritance to help bail these Americans out. After all, baby boomers and the Silent Generation are expected to pass down $72.6 trillion to their descendants by 2045 as part of the Great Wealth Transfer, according to the research firm Cerulli Associates. And of all age groups, Generation X is expected to inherit the most — $29.6 trillion, by Cerulli's estimate, including $8.9 trillion by 2032.

But according to Prudential, Gen Xers don't see things that way. In fact, only 12% of the respondents said they expect an inheritance to bolster their retirement income.

What could explain this pessimism? One possibility is that even if Gen Xers know how much wealth their parents have, they also know how it's being spent. And as they watch their parents pay for healthcare, rising living expenses and other costs, Generation X may not expect much to be left over for the will.

"I think in terms of the wealth transfer, some of the [Gen X] people are going to get money," said Barbara Pietrangelo, a certified financial planner at Pruco Securities, Prudential's network of wealth managers. "But keep in mind, baby boomers are living longer … That generation may need money to pay for care as well."

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Younger boomers are not OK

Baby boomers tend to get lumped together as one group. But in terms of retirement savings, younger boomers are in much worse shape than older ones.

That's according to a study by the Center for Retirement Research at Boston College, which compared "late boomers" — those born in 1960 to 1965 — to "early boomers," born in 1948 to 1953. By the time they reached their 50s, the Center found, the late boomers had 19% less retirement wealth than the early ones did at the same age.

The main reason, the study said, was the 2007-2009 financial crisis.

"The late boomers were hit really hard by the Great Recession," said Anqi Chen, one of the study's co-authors. "It was the earnings lost during the recession that really set them back."

Typically, Chen said, Americans reach their peak earning years in their 40s and early 50s. But for those at the younger end of the baby boom, those were exactly the years when the economy was in crisis — in 2007 to 2009, late boomers were somewhere between 42 and 49 years old.

In addition, something else set this age group apart. Unlike their predecessors, late boomers worked and saved at a time when pensions were no longer the dominant retirement plans. Instead, they had defined-contribution plans like 401(k)s and IRAs — and that meant their retirement income was not guaranteed.

"Late boomers had a double whammy between the Great Recession and the shift to 401(k) plans," said Jay Zigmont, founder of Childfree Wealth in Water Valley, Mississippi. "As the first group to truly embrace 401(k)s as their primary retirement savings, this can be very dangerous. Not working during peak retirement saving years can set people back years on their retirement."

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Younger baby boomers face deep shortfall in retirement savings