About four in 10 Americans don’t believe they’ll be financially prepared to retire when the time comes, according to the latest segment of Northwestern Mutual’s 2022 Planning & Progress Study. The average American believes they’ll need about $1.25 million to retire comfortably, the survey found, a 20% increase over their predictions last year. 

“It’s a period of uncertainty for many people, driven largely by rising inflation and volatility in the markets,” Christian Mitchell, executive vice president and chief customer officer at Northwestern Mutual, said in a statement.

The uncertainty likely stems, in large part, to the fact that retirement savings balances took a big hit, dropping 12% on average over the past year. Gen Z (ages 18-25) saw the worst of it, with a nearly 20% loss on their savings, followed by Gen X (ages 45-57) who lost almost 15%, according to Northwestern Mutual’s data. 

It likely doesn’t help that many Gen Zers have their money in riskier investments—half own individual stocks while 43% own cryptocurrencies outside of their 401(k) portfolio, according to Schwab’s 2022 401(k) Participant Study. These younger investors are also less likely to own less volatile fixed income investments. 

That makes sense, says Tim Harrison, founder and CEO of Harrison Financial Services, a Northwestern Mutual Private Client Group. “Most financial plans build in more risk at younger years, so it’s not terribly surprising that Gen Z would see a larger impact from things like market declines. The good news is that young people have plenty of time to make up for those losses, and if they’re disciplined about things like maintaining retirement contributions as markets swing up and down, history has suggested that dips can be longer-term buying opportunities.”

Younger people also can sometimes be lulled into thinking that the good times will just keep getting better, Harrison says. There is a behavioral investment bias called the "house money effect" where if a Gen Z investor, for example, has invested in a stock that has generated high returns, it can feel like more like gambling with "house money" at a casino—winnings, rather than money earned. “Younger people especially are often willing to take more risk with this gain capital because they feel like it was not their money in the first place,” Harrison says. 

It’s also worth noting that unlike older generations, most of whom started investing through a 401(k), only 37% of Gen Zers reported they got their investing start with the traditional retirement account structure. Instead, nearly a quarter (22%) started investing by opening an account on a mobile trading app. 

But while Gen Z has a long time horizon to make up for any shortfalls, Gen X saw a 15% drop, and they lost the most in terms of total dollar amount. “That presents a whole different scenario as Gen Xers are considerably older, and the impact of those losses could have a greater impact on their retirement plans,” Harrison says.

Planning and discipline is critical for older investors as well, Harrison says. Sometimes losses can lead to decisions driven by panic. 

Dismal market performance is one factor for the lower balances, but the drop may also indicate Americans are pausing or slowing their contribution rates. Many Americans have admitted to cutting back amid inflation—54% say they have stopped or reduced retirement savings, according to a the latest Allianz Life study. And a quarter of Americans admit they’ve already had to dip into their retirement savings to the point where it will likely delay their retirement. 

That could be why more Americans are now saying they’ll retire later—the average expected retirement age jumped from 62.2 to 64. Shifts, however, are to be expected. Market performance, inflation, a return to normalcy—all of these have an impact on retirement savings, Mitchell says. “These factors are leading many people to recalibrate their thinking about how much they'll need to retire and how long it will take them to get there."