Retirement savings terms every millennial and Gen Z-er should know

Many Americans aren't prepared for retirement. And the younger they are, the worse the problem is.

A 2019 survey by Sunmark Credit Union found that 64% of Americans will retire broke, with Generation Z (born between 1995 and 2015) and the youngest millennials at most risk. More than half of each group had nothing saved for retirement, including 63% of Gen Z-ers and 54% of millennials ages 25 to 54.

Saving for retirement doesn't have to be painful. Here's some information you need to get started.

Understanding 401(k), 403(b), and IRAs

When it comes to retirement savings, you have several options based on your employment and whether you want to open a personal account. Employer-sponsored accounts are typically 401(k) plans or, in the nonprofit sector, 403(b) plans. These plans allow you to contribute a portion of your wages for investment by the plan.

You can also open an individual retirement account, or IRA, with a bank, insurance company or other financial institution. The most common IRA is not related to your employment and allows you to save up to $6,000 per year in 2020 ($7,000 if you're over age 50). You may participate in an IRA even if you have an employer-sponsored retirement plan.

SEP and Roth IRAs

IRAs come in a number of types. Simplified Employee Pension (SEP) IRAs and Savings Incentive Match for Employees (SIMPLE) IRAs are available for self-employed individuals and have higher contribution thresholds than typical IRAs. In 2020, SEP IRA participants can contribute as much as 25% of their net self-employment earnings up to $57,000. SIMPLE IRA participants can put all of their net earnings from self-employment in the plan up to $13,500 in 2020, plus an additional $3,000 if you're 50 or older in addition to either a 2% fixed contribution or 3% matching contribution.

While contributions to "traditional" IRAs are made with pre-tax dollars and may be deductible from your taxable income, contributions to Roth IRAs are made with after-tax dollars. When you take distributions from these tax-deferred IRAs, you will owe tax on that income. However, distributions from Roth IRAs are not taxable—including the earnings you've enjoyed over the years.

Employer 401(k) matching

To incentivize employees to save for retirement, employers may match employees' contributions to their retirement plans. For example, your employer may match your contribution up to a certain percentage of your salary, contributing that amount to your plan. It's like getting additional compensation that you'll receive when you begin taking distributions from your account.

Annuities and income for life

Annuities are contracts that provide income for a fixed period of time or for life, depending on how the annuity is structured. You purchase the annuity, typically with a lump sum, and it provides guaranteed income. Annuities aren't for everyone, and the fees can be high, so be sure to do your homework before considering one. An annuity may be a good option if you aren't comfortable with stock market fluctuations or if you wish to leave more money to heirs or charities.

Why worry about retirement now?

The reasons young people don't prioritize retirement savings include not making enough money and believing that they have plenty of time to begin saving. However, using the power of time is one of the best ways to maximize retirement savings. Saving $200 per month starting at age 24 at a 7% return over 30 years would result in an inflation-adjusted $801,338 nest egg before taxes at age 65, according to Bankrate's retirement income calculator.

By using the power of investing over time, your contributions and reinvested dividends may grow in value. If you start now and regularly contribute, increasing your contributions as you progress in your career and earn more, you could potentially build a sizable nest egg with manageable payments. An excellent place to start is with your employer-sponsored plan, especially if it offers a matching contribution, and then look for other ways to save to help improve your long-term financial security.