The new generation of Gen Z adults (Aged 18-25) are not so concerned about saving money for retirement. Instead, according to a recent study, they believe in enjoying life and living for the experience. This ‘soft saving’ syndrome could be dangerous for this group later in life or at retirement.
What has happened to cause this viewpoint of saving, especially with today’s emphasis on retirement shortfall and potentially downgrading retirement lifestyle?
What is soft saving?
Soft saving is a trend among younger generations. Especially Gen Z, that embraces a more casual approach to saving for retirement or not at all. They have no interest in ‘FIRE’ Financial Independence, Retire Early – and favour experiences over retirement. They prioritise a better quality of life over building savings.
Young adults feel discouraged to save. In fact, 53% say the high cost of living is a barrier to their financial success. Their income is lower than their parents earned at their age, especially among Gen Z and Millennials. Add rising inflation and staggering student debt, and you have the trigger for soft savings.
The viewpoint of the youngest addition to the labour force is quite disturbing. However, it reminds us of the power compound interest has on saving.
Compounding interest in investments
Nothing can make a pension or retirement fund grow better than compounding interest. All you need is time. Every extra year makes a huge difference. History has shown that the earlier you start saving for retirement, the more time compound interest has to work its magic.
A £100 retirement savings contribution starting at age 25 for 40 years till retirement age of 65, with an average interest of 5% gives you £153,337 (£48,000 in contribution and £105,237 in interest)
If you start at age 45 and save for 20 years till age 65, you would need to save £375 a month to achieve the same total (that is more invested capital at £ 90,000 and less compound interest £64,779)
That’s almost double the contributions with less compound interest earned.
Even a small amount at a younger age has a bigger impact on savings than a larger amount later.
The importance of financial planning
Now, more than ever before, in these modern times, the importance of a retirement savings account is stressed. With dwindling, workplace pensions, a state pension system that is in trouble and the cost of living increasing exponentially, private pensions are the solution to help build retirement funds. People are living longer and leading more active lives, and you need to consider where your income will come from when you no longer work.
A retirement investment need not be a financial burden, even for the younger generation struggling to make ends meet. It’s all about balance. You need not sacrifice or risk all your creature comforts and disposable income allowance to start a retirement plan or increase your retirement savings.
Unless you have a trust fund or stand to inherit millions, you’ll want retirement savings. It is also one of the few areas where you can get tax relief.
Chat with a financial advisor to help you make your retirement savings more tax-efficient and also revise your budget to make more money available for your private pension savings.
Please note, the above is for educational purposes only and does not constitute advice. You should always contact your deVere advisor for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.