What If Your Children Can’t Afford To Retire? (Part 2 of 2)

Still Time To Get On Track

My previous article showed that if Generation Z stays the course, they might get squeezed out of retirement. But it’s not all gloom and doom. Here’s why.

Time is on their side

Gen Z has one huge advantage on their side: time. It’s one of the most valuable assets because it allows money to grow. Most of us know about the wonders of compound interest, but what fails to be hammered in is that starting young is everything. Take a 23-year-old that saves 50$ a week at a 6% interest rate. In 40 years, he will have put aside $432k. But if that same 23-year-old doesn’t start saving until he is 33, he will only have $218k by the time he’s 63. That $214k difference could have easily given him an extra 3 to 4 years of quality time with the grandkids (1).

Action: Start saving sooner
Result: $214k difference over 40 years
Gain: 3 years of retirement

Technology is their friend

In a June 2020 study based on more than a thousand Gen Z-ers, every single participant reported using at least one financial app to help them spend, borrow, and grow their money (2). That’s a generational game-changer in a context where the average family renounces between $2,000 and $3,500 in economic benefits per year because they don’t have the right tools to shop around for financial products (3). It could be as simple as getting a better deal on car insurance, the best rate on a mortgage, or being reminded to borrow with a line of credit instead of a credit card. If we take the lower end of that spectrum, $2 000 a year, and add a 6% compound interest over 40 years, that amounts to $323k, which is quite a few margaritas on the beach.

Action: Use technology for optimal financial decisions
Result: $323k difference over 40 years
Gain: 4–5 years of retirement

They have a positive outlook

In the 2020 survey, Generation Z Insights — How the Next Generation of Investors Approaches Retirement, Saving, and More, Gen Z-ers are keeping their heads up despite bleak times. 59% of them still think they have a shot at retirement, and a majority of those believed that they could retire by 65 (2). Optimism is the best remedy against skittish investing and sitting on a pile of cash (4). A whopping 42 % of current TFSA holders have a significant portion of their accounts in cash, and more than a trillion is parked in cash balances and chequing accounts across the country. Putting that money to work is the surest way to get more out of assets that pay negative returns after inflation and taxes (5). If the average Canadian invested just a fraction of those assets at a 6% rate, it could mean gains of $142k over 40 years for basically doing nothing: that’s sweet.

Action: Put your disposable money to work
Result: $142k difference over 40 years
Gain: 2 years of retirement

They are eager to learn

In a June 2020 study based on more than a thousand Gen Z-ers, every single participant reported using at least one financial app to help them spend, borrow, and grow their money (2). That’s a generational game-changer in a context where the average family renounces between $2,000 and $3,500 in economic benefits per year because they don’t have the right tools to shop around for financial products (3). It could be as simple as getting a better deal on car insurance, the best rate on a mortgage, or being reminded to borrow with a line of credit instead of a credit card. If we take the lower end of that spectrum, $2 000 a year, and add a 6% compound interest over 40 years, that amounts to $323k, which is quite a few margaritas on the beach.

Action: Use technology for optimal financial decisions
Result: $323k difference over 40 years
Gain: 4–5 years of retirement

METHODOLOGY

1. Compound interest calculations are based on a 6% annual investment return rate.
2. $70K required per year of retirement is based on 70% of the average individual income adjusted with a 2% inflation rate minus the average old-age security income also adjusted to inflation.

REFERENCES

1. New Grad Retirement Report, Nerd Wallet 2015
2. Generation Z Insights — How the Next Generation of Investors Approaches Retirement, Saving, and More
3. Breaking New Ground in Fintech: A Primer on Revenue Models that Create Value and Build Trust
4. Managing Personal Finance Literacy in the United States: A Case Study.
5. Are you a Canadian cash hoarder? Here’s why you shouldn’t run and hide
6. How Financial Literacy Affects Household Wealth Accumulation
7. Financial Literacy, Retirement Planning and Household Wealth

Originally published at https://walo.app on September 22, 2020.