Gen Z, the first digitally native generation, must tackle specific financial challenges as young adults. Inflation, soaring rates and the resumption of student loans, to name a few, can make the road to saving for retirement tricky for many of them. Against this backdrop, how much risk should these young Americans be taking with their retirement savings?
It’s important to note that this cohort also has more access to financial information thanks to social media and apps, compared to older generations — an advantage, which coupled with a longer-time horizon, can give them a leg up in terms of savings.
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“Gen Z has on average begun their retirement savings earlier than any generation before them which will pay off in time as those funds grow,” said Stephen Kates, CFP, principal financial analyst at RetireGuide.com.
According to Kates, it is likely that Gen Z will be positioned better than any preceding generation when it comes to retirement if they maintain this diligence.
A Greater Appetite for Risk — Which Should Be Managed
As Kates noted, during the pandemic, Gen Z dove headfirst into online trading, online personal finance education and investing.
“While much of the information on TikTok, Instagram and other platforms is suspect, the sheer interest in succeeding financially will pay off,” he said, adding that most prior generations didn’t begin saving in earnest until their late 20s or 30s and didn’t have access to the same level of financial literacy content which left them less prepared for the reality of retirement planning than Gen Z.
According to Kates, some portions of Gen Z also have a very high tolerance for risk — as demonstrated by their participation in meme stocks, stock options and other risky strategies.
Yet, while these high-risk strategies can pay off through high growth potential, risk must be managed carefully so it does not wipe them out.
“Individual stocks, options, cryptocurrencies and other aggressive investing positions have the potential to cause ruin during market instability or when positions are over concentrated,” he said.
And unlike during the 2022 downturn, Gen Z will have more money on the table during the next market rout and the stakes will be higher.
“It is better to learn those lessons early with little money, than later when the position sizes are larger,” Kates added.
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The Risk of Being Too Conversative
At the same time, Gen Z adults also face the risk of being too conservative with their retirement savings, which can end up minimizing their nest egg down the (long) road.
In turn, thanks to their very long-time horizon, they should “absolutely” take appropriate risks to maximize returns, said Bobbi Rebell, certified financial planner (CFP) and personal finance expert at CardRates.com.
“That doesn’t mean throwing money at meme stocks or some unvetted investment suggested by someone you know,” Rebell said, adding that the biggest risk is being too conservative and not investing with an eye toward your financial goals.
Embrace Volatility While Building a Safety Net
These young adults are also early in their career and may still be in the process of establishing their financial foundation such as building an emergency fund and saving for other short-term goals.
“This means finding a balance between saving for immediate needs and preparing for long-term retirement is key,” explained Uziel Gomez, CFP, accredited financial counselor (AFC) and founder of Primeros Financial.
Gomez (who advises many Gen Z adults) noted that when investing for long-term goals such as retirement, this generation should be prepared to embrace a higher risk tolerance and the associated volatility, given that they won’t need access to these funds for 30 years or more.
“However, it’s essential to build a solid safety net with three-six months’ worth of living expenses in a savings account while avoiding risks such as over-leveraging, neglecting immediate needs and lack of diversification,” he said.
The Risk of Not Diversifying
Nick Scibilia, CEO and co-founder of Orbit and part of Gen Z himself, stressed the fact that tech is the differentiating factor, as it has changed the game for how young people plan for the future.
Yet, in terms of investing and level of risks, Scibilia said that Gen Z should not only invest early, but invest in a diverse mix of stocks and assets, as the advantage of time allows them to weather market downturns and maximize gains during the upswings.
“And yes, like many of us, I’ve dived into the meme stock frenzy and actually found success,” he said. “But, the big takeaway from my experience — and what I’d stress to any of my peers — is the importance of diversification.”
According to Scibilia, Gen Z should also anchor retirement savings with more stable and traditional investments such as blue-chip stocks.
“These provide a reliable growth foundation and help buffer against the volatile swings of trendier investments,” he added.
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This article originally appeared on GOBankingRates.com: Gen Z: How Much Risk Should You Be Taking With Your Retirement Savings?
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