You don’t hear much about the millennial generation being enthusiastic investors. That’s because so far, they’re not.

Multiple studies have shown that fewer millennials—roughly defined as those born between 1981 and 1996—invest than did previous generations at their age.

But considering their experience with the markets, debt and the economy thus far, some would say they have good reason to hold back.

For the past decade, many millennials have had a tough time entering the workforce and have faced high student debt. And while the economy has since improved, many remain reluctant to invest given the volatility of the stock market. This is a generation scarred by watching their parents struggle through the 2007-09 recession—the worst economic downturn since the Great Depression—and struggle yet again amid the COVID-19 pandemic.

“They grew up having dinner with stressed out parents talking about how they were burned,” says Angie O’Leary, head of Wealth Planning at RBC Wealth Management–U.S. “Seeing their parents get so close to the retirement goal line and lose the ability to retire in the way they wanted to made [millennials] shy about investing.”

But instead of avoiding the stock market, millennials should embrace it—particularly as they start earning higher salaries and building wealth. And thanks to new technology and apps, it’s easier than ever for them to do so.

Millennials’ approach to money and investing 

Millennials are now the nation’s largest living generation at a population of approximately 72 million, according to a 2020 population estimate from the Pew Research Center, and they’ll only grow in power and influence over time. The Brookings Institution projects the group will account for more than 30 percent of adult Americans by 2020 and as much as 75 percent of the workforce by 2025.

Data shows millennials tend to be single and highly educated, but they may not own a car or a home. Despite that, many millennials report making progress on their broad financial goals. Nearly three-quarters of the demographic say they’re saving for the future, a 10 percent increase over the past two years, according to a 2020 millennial report published by Bank of America. During this period, millennials have also increased their emergency savings by reducing their spending.

Still, many millennials face hefty student loan payments. According to research by Experian, millennials have an average of $38,877 in student loan debt as of 2022. 

That high debt, along with the fear of getting involved in a volatile stock market, are some of the reasons millennials tend to be conservative about saving and investing their money.

David Brown, a wealth planning consultant manager at RBC Wealth Management–U.S., says millennial clients typically have about 25 percent to 30 percent of savings in cash.

“Their portfolios look similar to people in their 70s, 80s and 90s,” Brown says. “Millennials have felt more comfortable keeping more money in cash, partly because they may have seen their parents or grandparents lose 30 percent to 40 percent of their savings in the Great Recession.”

But that’s not necessarily the right mindset for a generation with so much time left in the workforce. Millennials, more than older generations of workers, should be able to stomach higher risk for higher-reward investments, financial advisors say.

“It’s almost like putting cash under the mattress or in the freezer,” Brown says.

Focusing on the long term

Saving for retirement is more important than ever with fewer employer-sponsored pension plans available to American workers as well as questions about the longevity of Social Security

“It’s a major concern with the uncertainty of Social Security and lack of pension plans,” says O’Leary. “Millennials are not going to be saving enough for retirement.” As a result, while their parents might retire in their late 50s or 60s, millennials could end up working into their 70s without a private savings plan in place, she says.

But getting millennials to invest and think about retirement early means they must focus on the long term instead of daily stock market and economic volatility.

“There’s been more volatility over the last few years than a normal market,” O’Leary says. “Typically, people will wait until things feel better and then jump in, but millennials really haven’t done that and they haven’t benefited from that jump in markets.”

How to get started

O’Leary suggests those new to investing start by setting long-term goals such as saving for retirement. Aim to save money in a retirement account, such as an employer-sponsored Roth 401(k) or IRA, to benefit from tax-deferred growth. Saving 10 percent of your income—or at least enough to earn the matching contribution from your employer—is a good starting point.

Next, create a rainy day fund to ensure you have enough money in a liquid account to cover three to six months of living expenses if you lose your job or have an accident.

It’s estimated that most people will need 70 percent of their pre-retirement income to live at a similar level of comfort. The biggest retirement fear among 18- to 29-year-olds is running out of money, according to a 2018 Gallup survey.

It’s best to invest early because of something called compound interest, O’Leary says. Returns grow over time on the original amount invested and on any accumulated interest, dividends and capital gains.

For example, someone who invests an initial $500 and makes monthly contributions of $250 would see savings of $173,249 in 25 years based on a six percent annualized rate of return, according to RBC Global Asset Management.

“Millennials are at a point in their lives where they still have time on their side,” Brown says. “What I tell people is to save from day one, because you’ll never miss it.”

Five investment tips for millennials

O’Leary and Brown have these suggestions for millennials:

1. Invest early

Investing smaller amounts of money over a longer period of time is a better strategy than investing a larger sum later due to compound interest.

2. Invest regularly

Invest a fixed dollar amount on a regular basis to smooth out returns over time. An easy way to do this is through a company 401(k) because it comes out of your paycheck.

3. Save through retirement accounts

Make the maximum pre-tax contribution, which lowers your adjusted gross income and, therefore, your taxes. Money in a 401(k) is taxed upon withdrawal.

4. Take the 401(k) match

If your employer offers matching funds to your 401(k) contributions, take the maximum benefit. “It’s free money,” Brown says.

5. Consider a Roth IRA

It’s a counterbalance to a 401(k) because withdrawals in retirement are tax free. Taxes on contributions are paid upfront, so it’s better to invest in a Roth IRA when you’re younger and probably in a lower tax bracket than later in life. Roth IRAs have income limits that may exclude you later.

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