Gen Z expects to retire for 40 years. Good luck, say the experts

A recent survey of Gen Z shows amazing confidence when it comes to their retirement.

Zoomers don’t just think they’ll retire at 60 on average, according to A survey from Northwestern Mutual, But 2 in 5 also expect to live to 100. They also expect to need just $1.2 million to fund a 40-year-old’s retirement, the lowest estimate of the nest egg among the four generations of adults in the survey.

The research highlights a stark contrast between Gen Z’s expectations versus the reality of their retirement, and financial advisors say those who don’t change their outlook or predispositions may be in for a rude awakening.

“It is possible, but are the twenty people willing to make sacrifices today to ensure that such a long retirement will be possible?” Kashif Ahmed, president of American Private Wealth, told Yahoo Finance. “I am pessimistic”.

But Zoom is not.

In fact, while they’ve so far saved an average of $35,800 for retirement, nearly two-thirds of Generation Z “expect to be financially ready for retirement.” Only 52% of non-outgoing Boomers, 45% of Generation X, and 54% of Millennials were optimistic.

And Generation Z doesn’t depend on Social Security either to realize retirement dreams.

The survey found that millennials expect an entitlement program to provide only 15% of their retirement income. By comparison, Boomers expect it to cover roughly 40% of their retirement funds, according to the report.

The point that bothers financial planners is the total amount that Gen Z think they need to save – $1.2 million. For comparison’s sake, Americans in their 30s estimated they needed $1.44 million to retire, while those in their 50s expected $1.56 million. (People in their 40s seem most optimistic with an estimate of $1.28 million, according to the report.)

“Yes, you can live on $1.2 million, but what lifestyle would you like to endorse?” Ahmed said, noting that few Americans managed to raise that amount in the first place. “Not comfortable.”

Story continues

Living on $1.2 million over four decades is unrealistic, said Asim Hafeez, who achieved financial independence, or an elective job, in his 20s. For example, Hafeez noted, such a figure does not appear to account for costs such as medical expenses, which inevitably increase with age.

“It seems to be a very wrong estimate,” he said. “There is no sufficient method for that.” “You’re older, you’ll probably have more expensive medical expenses on your own because your body is breaking down a little bit. You may need some extra care at some point.”

A recent analysis found that half of the 35 million people with traditional Medicare spent at least 16% of their income on out-of-pocket health care costs. Annually, they spent an average of $6,663 on insurance premiums and medical services. And Medicare doesn’t cover long-term care, which can be very expensive.

So how much money would someone need to live comfortably in retirement for 40 years?

Linda Farinola of Princeton Financial Group broke it down.

She said that if someone wanted to live on $4,000 a month after taxes for 40 years — factoring in inflation of 3% and a return on invested pension funds of 6% — they would need roughly $4 million.

“I don’t think they don’t fully appreciate the cost of living and the impact of inflation over a 40-year period,” she said. “Just show them the math. It’s simple arithmetic.”

Jane Grant of Berryman Financial Advisors said that younger generations can often fail to estimate the expenses of everyday life. Many may still rely on their parents for expenses like phone bills and not realize the other costs that come up as people get older.

She said: “I think there’s that point where they’re on the brink of adulthood and they start making money…but I don’t think they were fully immersed in some of the minutiae of adult life”. “If you think all I have to pay is rent, utilities, and food, that’s a different life than the rest of us who think, ‘I got county property taxes’ and the older I get, the more refined my finances become.”

Still, there’s no need to completely burst the Gen Z retirement bubble, these experts said. If they really want to retire at 60 and plan for 40 golden years to follow, they just need to be realistic about achieving their retirement goals.

For example, Gen Zers should meet with a financial advisor and create a plan tailored to their individual needs, said Aditi Jaffrey Gokhale, chief strategy officer and head of institutional investments and head of retail investments at Northwestern Mutual.

A Northwestern Mutual study found that “people who are considered disciplined financial planners subtract two years from the retirement age,” while “non-planners add two years.”

Gokhale asserted that the scheme could help Gen Zers navigate goals such as marriage and starting a family, putting their children through school, and long-term retirement.

“So it’s about five years, 10 years, 20 years, and then retirement. So to think about that, you need to start setting goals and planning goals,” she said. “And this is how you start having a conversation about both short-term goals and retirement goals.”

In addition to saving in a traditional Roth IRA and 401(k), Hafeez recommended that Generation Z look at other cash-flow-providing investments like real estate.

“The holy grail of retirement is focusing on monthly cash flow that can also be adjusted for inflation over time,” he said.

Meanwhile, Ahmed emphasized that there is no way to beat hard work, diligent saving and proactive planning for an optimal retirement.

He said, “I always tell my kids to look at the squirrels during the late summer and early fall. They’re busy like crazy grabbing all the nuts and whatever they’re going to throw at.” “Because they know winter is coming… Winter is your retirement and you have to save for it now.”

Dylan Kroll Yahoo Finance Correspondent.

Click here for the latest personal finance news to help you invest, pay down debt, buy a home, retire and more

Read the latest financial and business news from Yahoo Finance