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 1980 and 1999 – 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 and the labor market have 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.
“They grew up having dinner with stressed out parents talking about how they were burned,” says Heather Krause, a financial adviser for RBC Wealth Management-U.S. in Seattle. “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, experts say Millennials should embrace it – particularly as they start earning higher salaries and building wealth.
Who are Millennials?
Millennials are now the nation’s largest living generation at a population of approximately 83.1 million according to 2015 population estimates from the U.S. Census Bureau, 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. Census data shows they tend to be single and highly educated, but they may not own a car or a home.
The typical Millennial doesn’t save much money either. Just over a quarter of the cohort save more than 10 percent of their income, compared with a third of people age 30 to 49, according to a March 2016 survey by personal finance website Bankrate.com.
That’s likely because many Millennials are facing hefty student loan payments. Sixty-eight percent of new college graduates (at public and nonprofit schools) carried an average $30,100 in student debt in 2015, according to The Institute for College Access & Success. For all these reasons – fear, market volatility, high debt -- Millennials tend to be conservative about saving and investing their money.
Eric W. Anderson, a financial adviser for RBC Wealth Management-U.S. in Minneapolis, says his 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,” Anderson 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,” Anderson says.
Why Millennials are on their own
“It’s a major concern with the uncertainty of Social Security and lack of pension plans,” says Anderson. “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, he 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,” Anderson 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.”
Anderson suggests those new to investing start by setting goals, such as buying a house, and when they want to reach those goals. 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, Krause says.
From there, aim to save money in a retirement account, such as an employer-sponsored 401(k) and IRA, and then look at other options. Saving 10 percent of your income is a good starting point, Anderson says.
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 2015 Bankrate.com survey.
It’s best to invest early because of something called compound interest, Anderson 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.
“What I tell people is to save from day one because you’ll never miss it,” Krause says. “People can get their hands wrapped around college education, but they need to understand the importance of a retirement plan. It’s getting that concept of the future self down.”
5 investment tips for Millennials
RBC Wealth Management-U.S. financial advisors Eric Anderson and Heather Krause have these suggestions for Millennials:
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.
Investing 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.
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.
Take the 401(k) match
If your employer offers matching funds to your 401(k) contributions, take the maximum benefit. “It’s free money,” Krause says.
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.