To a generation that entered the workforce during the decade of the one-two punch of the 2000 stock market crash and the 2008 financial collapse, retirement planning might sound like an oxymoron. After seeing their parents suffer through the worst economic recession since the Great Depression, Millennials are gun-shy about investing and struggling to hold onto employment in a tight labor market.
Eyes on the prize
But despite the rocky financial entree into adulthood, Millennials — roughly defined as those born between 1980 and 1999 — have a lot going for them. They’re quick on the draw with technology, generally display more entrepreneurial drive than previous generations, and have an “intense curiosity” and mission to succeed, said Sophia Bera, a Millennial and founder of Gen Y Planning. “I actually see more opportunities than challenges,” she added.
But getting Millennials to remain focused on a retirement that could be 40 or more years away means convincing them to invest early, think long-term, and take advantage of tax-advantaged accounts and company matches, where available. If they can ignore stock-market volatility, day-to-day economic news, and stay focused on the end goal, they have a time horizon that will pay them back in spades.
Millennials with high-paying jobs would be well-advised to save the bulk of their salary early. Even if retirement saving is stalled or slowed later on due to major events in life, such as marriage, children or job loss, the money they invest early will fund a nice nest egg.
“If they put $50,000 in a 401(k) at age 25 and don’t touch it, assuming a [annual] seven percent return, they’ll have $800,000 or more by the time they’re 65, just through the compound value of money,” said Brandon Honcoop, senior vice president and senior portfolio manager with RBC Wealth Management. “I really stress to Millennials that they need to take the long-term approach. Every 10 years they delay starting, they have to save double.”
A new view on the market
Today’s roller coaster stock market would give any investor pause, but Millennials have extra reason to be leery, said Rick Friedman, senior vice president and financial advisor for RBC Wealth Management. “I don’t think they trust the market in general. Part of the reason is they’ve never seen a normalized cycle, compared with the Baby Boomer generation, who witnessed the markets climbing during the ’80s and ’90s,” he said. “We weren’t having these swings of a hundred points a day, or thousands of points a week.
Stock market volatility and the sluggish economic environment have left scars on the oldest Millennials, said Honcoop. “Coming out of the tech bubble, if they had jobs, they lost them during the tech bust,” he said. “They got new jobs in the mid-2000s, only to lose them again during the recession. They’ve been burned twice and in some cases, forced to dip into money that they might have looked at for the long term.”
As a result, Honcoop said when Millennials do invest in the market, they tend to be too conservative for their age. Often, they choose the same asset allocation as their parents, who are a couple of decades closer to retirement. To simplify age-appropriate asset allocation, he recommends target date funds, which are in most company-sponsored retirement plans.
These funds are targeted to a specific retirement year and allocate a mix of equities and bonds that start out more aggressive to promote growth and, as the investor nears retirement age, adjust in favor of bonds in order to reduce the possibility of extensive losses approaching retirement.
Friedman also recommended target date funds for Millennials as a solid place to start investing. “It gives them the ability to be fully allocated without having to monitor it every day,” he said. Rebalancing is not necessary because the fund does it for you.
Bera agreed that retirement investing doesn’t have to be complicated with worries about whether an 80-20 mix of stocks and bonds is better than 75-25. “I tell Millennials that the main thing is to get into your 401(k),” she said. “Asset accumulation is more important than asset allocation in the early years.”
Multitasking retirement planning
Planning for the future while paying for today involves a bit of multitasking. Millennials should follow this list of fiscal priorities:
- Fund a savings account for emergencies: “I call it an airbag,” said Friedman. Whatever you call it, Millennials should put 10 percent to 20 percent of their pay into an account for emergencies, so if they lose their job for a period, they have cash in reserve.
Friedman recommends saving in such consistently small bites that you hardly notice. Because Millennials in general don’t carry cash and run the risk of not realizing how much they spend, he also suggests creating a monthly budget that tracks spending and adding a saving component.
- Maximize retirement account savings: Honcoop believes too many Millennials don’t take advantage of what he calls “government gimmies.” Retirement accounts such as IRAs and 401(k)s are terrific way to boost savings because of their favorable tax status and—if the plan is sponsored by your employer—the company match, he added. “I tell clients that most companies have some sort of retirement account with a match of 3 percent, so why would you leave 3 percent of free money on the table? You wouldn’t do that if you saw $100.”
Bera said part of the reason Millennials are reluctant to contribute to a retirement account is they lack fiscal education and don’t understand their 401(k). “They say, ‘I’ve signed up, now what do I do?’” I explain that they never have to touch it if they have an emergency savings account.”
Millennials are known to change jobs often, Friedman added, so they should weigh the pros and cons of keeping their current company retirement account, moving it to a new employer plan or rolling over to a traditional IRA
For an additional boost, Millennials can contribute to a Roth IRA, said Honcoop. When they advance in their careers and earn more money, the income limits will preclude them from having both a Roth and traditional IRA, so the earlier they contribute to both, the better.
- Simultaneously tackle debt: No doubt about it, Millennials are often saddled with significant student loan debt. After securing their emergency fund, they can aggressively pay down their loan while simultaneously saving for retirement, said Bera.
Put enough toward the 401(k) initially to at least obtain the company match, she added, and then, with each raise, bump up the investment by 1 percent or 2 percent while continuing to whittle down debt. “It’s what I call turning up the knob on retirement,” she said.
While the basic tenets of solid retirement planning haven’t changed over the past few generations, Millennials will find their desire to work longer in a career that gives their life meaning will benefit them, said Friedman. “I think the millennials have a very different outlook on life and, in some ways, I think they’re doing it the right way.”
This article was originally published on Forbes WealthVoice.