If building wealth is an obstacle course for Gen Z and millennials, they’re willing to jump all the hurdles. The youngest generations contributed more to their 401(k)s last quarter than anyone else at a time when the promise of retirement has never felt less hollow.
That’s according to Bank of America’s Q2 2023 Participant Pulse report, released Tuesday, which found that Americans’ average 401(k) balances have increased by $7,250—nearly 10%—since the end of 2022. This quarter, many more of the 4 million workers BofA analyzed increased their contribution rate than decreased it. That push was led by the youngest workers, who contributed more than any other age group: 19.3% of Gen Zers upped their contributions, as did 11% of millennials, compared to 9.7% of Gen Xers and just 7.8% of baby boomers.
The momentum among Gen Z and millennials (fewer than 3% of them decreased contribution rates this year) contributing to their 401(k)s is exciting given that older generations usually outpace their younger colleagues both in 401(k) plan participation and contribution, says Lisa Margeson, managing director of external affairs, retirement research, and insights at BofA. Contribution rates can give us a glimpse into how 401(k) plan participants feel about retirement, she tells Fortune.
For young professionals, those feelings stem from the economic hardships they’ve weathered in early adulthood. Millennials, who grappled with two recessions before the age of 40, have struggled to accrue wealth amid a volatile housing market, crushing student debt crisis, and a soaring cost of living. Gen Z—many of whom don’t think they’ll ever be able to retire—have borne witness to millennials’ strife and are anxious to avoid falling victim to their same pitfalls.
“The onset of the COVID-19 pandemic rocked the economy as Gen Z entered young adulthood,” Charlie Pastor, a financial planner, told Fortune’s Alicia Adamczyk. “Older generations should understand that the next generation of savers has seen a lot of economic turbulence in a short period of time.”
Considering that $1 million is no longer enough to retire in today’s economy, retirement feels far out of reach for many young adults, who want to start saving as early as possible (no wonder Americans’ number one financial regret is not saving enough for retirement). The share of workers unsure they’ll ever be able to retire has grown from 10% to 24% since 2021, a BlackRock report found, with Gen Zers feeling the least confident. It explains why they invest in their company’s retirement plans at significantly higher rates than their older colleagues did when they were their age.
Yet, at the same time, a growing number of workers are withdrawing “hardship distributions” from their retirement accounts in an economy that has been marred by sky-high inflation. Thirty-six percent more people have done so this year than last year, BofA found.
“The data from our report tells two stories—one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals,” Lorna Sabbia, who leads BofA’s retirement and personal wealth solutions, wrote in the report. But despite dire straits, she added, employees must continue investing in “life’s biggest expense”: retirement.
Start ’em young
Of course, Gen Z and millennials might be a bit better at saving for retirement because the benefits of saving early have become more widespread over the years. “While saving for retirement is important for all employees, we want to encourage younger employees to get started as soon as possible,” BofA’s Margeson says. “Saving and investing your money early in life will put you on the best path forward.”
It’s hard to undersell how crucial investing early really is thanks to the power of compound interest, which has "the potential to magnify regrets about foregone savings over time as a ‘what could have been’ realization becomes more stark,” Greg McBride, Bankrate’s chief financial analyst explained in a recent report on Americans' financial regrets. “At a modest 6.5% annual return, every dollar you put away in your twenties becomes $17 by the time you retire.”
Most experts advise contributing at least up to the full employer match to maximize your benefits. But if you’re on an entry-level salary, putting away as little as 1% to 2% of your monthly earnings—if you can afford it—is better than nothing.
That compound interest might just be enough to convince Gen Z to save instead of spend, even if it means ditching their rich friends or suffering from vacation FOMO. After all, there will be plenty of time to travel if you can eke out an early retirement.
