How Gen Z Can Build Passive Income for Retirement
Forty percent of Gen Z adults who are actively planning for retirement say generating enough passive income to stop working is their top retirement goal, according to a new SoFi survey.
But “passive income” in retirement doesn’t necessarily mean collecting rent from an investment property or watching dividend checks roll in. For many retirees, it simply means having enough money from a combination of portfolio withdrawals, Social Security benefits and other income.
For Generation Z — whose members were born between 1997 and 2012 — that distinction is important. You don’t need to spend your 20s chasing investments that generate passive income decades from now. Instead, you can focus on building the portfolio itself and worry about turning those investments into income when you retire.
“The answer is boring, but effective,” says Geoff Schmidt, a certified public accountant and founder of Holy Schmidt, a retirement education hub.
Here’s what it could take.
How to build passive income for retirement
You don’t need a complicated investment strategy to start building a portfolio that could eventually fund your retirement. For most young workers, Schmidt says, the best approach is to take advantage of the accounts and benefits available to you and give your money as much time as possible to grow.
Start with your 401(k) match.
A 401(k) is a workplace retirement plan that lets you set aside money from your paycheck for retirement, often before taxes are taken out. With a match program, your employer contributes money to the account based on how much you contribute, up to a certain limit.
“If your employer offers a 401(k) match, that comes first, because it’s free money,” Schmidt says.
For example, an employer might match 100% of your contributions up to 3% of your salary. If you earn $60,000 and contribute 3%, you’d put $1,800 into your 401(k) over the year and your employer would add another $1,800, assuming you meet the plan’s requirements. The exact match varies by employer, so check your benefits to see how yours works.
That employer contribution gives your retirement savings an immediate boost — and the money can then stay invested for decades.
Consider a Roth IRA
Once you’ve gotten in a groove with your 401(k), a Roth IRA can be another way to save for retirement. Unlike a traditional 401(k), where contributions are generally made with pre-tax dollars, Roth IRA contributions are made with money you’ve already paid taxes on.
The trade-off is that you don’t get an upfront tax deduction on Roth contributions. But if you follow the rules for qualified withdrawals, you can take the money out tax-free in retirement. That can make a Roth particularly appealing to younger workers who are earning less now and expect to earn more later in their careers.
“You put in after-tax dollars now, while you’re in a low bracket, and the money grows tax-free for 40 years and comes out tax-free in retirement,” says Schmidt.
In 2026, you can contribute up to $7,500 to an IRA, including both Roth and traditional IRAs. Your ability to contribute directly to a Roth IRA can also be limited by your income and tax-filing status.
‘Build the pile before you worry about income’
Opening a 401(k) or Roth IRA is only part of the process. You also have to decide what to do with the money once it’s in the account. For young investors, Schmidt says, that generally means focusing on long-term growth rather than trying to generate income right away.
“The greatest superpower at 25 isn’t uncovering income-producing gems; it’s time,” he says. Rather than prioritizing investments because they pay dividends or other income today, young investors can focus on building a diversified portfolio with decades to grow.
Schmidt recommends keeping things simple and broad, such as investing in a total-market index fund. An index fund is a type of investment fund designed to follow a part of the stock market, giving you exposure to many companies at once rather than requiring you to pick individual stocks.
The idea is that you’re in a so-called accumulation phase of investing. Gen Z’s priority is building a portfolio over time, not necessarily turning that portfolio into a source of income yet.
“For most 20-somethings, tilting the portfolio toward dividend stocks or income investments is a genuine mistake,” Schmidt says. “There are two seasons in an investing life: accumulation, where you grow the pile, and decumulation, where you turn the pile into income.”
He says focusing heavily on income-producing investments too early can mean giving up some potential growth. And in a taxable brokerage account, you may pay taxes on dividends along the way even if you reinvest that money.
That strategy will likely change when you get to retirement. That’s when you can start turning the portfolio you spent decades building into the retirement income you originally wanted.
Of course, however, finding enough money to invest can be easier said than done. Nearly two-thirds of SoFi respondents who were saving or trying to save for retirement said financial stress had caused them to reduce or pause contributions at least occasionally over the previous year. And 63% said everyday expenses or housing costs were the biggest factors affecting their ability to save for the future.
But even if you can’t contribute as much as you’d like right now, starting early gives your investments more time to potentially benefit from compound growth. As your income increases or your expenses go down, you can increase your contributions along the way.
“Automate it and let compounding be the passive part,” Schmidt says.
