Investing as a Millennial
Millennials (those born between 1981-1996)* are facing tremendous headwinds when it comes to saving enough money for retirement. A generation which entered the workforce just in time to witness two major economic recessions in 2000 and again in 2008, has been met with stagnant wages paired with rising living expenses, healthcare costs, and extraordinary growth in student debt.
Meanwhile, the retirement plan industry has experienced a major shift in landscape from defined benefit pensions to defined contribution plans. This has placed the onus on American workers to take responsibility of their own retirement compared to previous generations’ ability to rely heavily on the employer. As a result, about two-thirds of today’s working Millennials have saved nothing for retirement**. This is in contrast to industry experts’ advice that 15%-20% of annual salary must be saved for this generation to be financially ready for retirement.
While saving for your goals forty plus years down the road may seem like something that can be put off for the time being, this article is meant to express the importance of starting the process today and how to do so. As a fellow millennial navigating this difficult environment to plan ahead, here are the top 3 tips to saving I have learned through my experience in the wealth management business.
1. START TODAY!
This is undoubtedly the most important tip on the list. So far, we have highlighted some of the hurdles young workers must face when it comes to saving; but what is the biggest thing Millennials have going for them? TIME. In attempts to express the power that compounding interest has on your retirement, let’s look at an example of saving $10,000 today vs. waiting ten years. Using the average annual return of the S&P 500 of roughly 10% since 1926, in 40 years that $10,000 saved today would grow to $452,593 compared to $174,494 if you wait ten years to save the same amount. As we can see, the difference is vast. That being said, there is no set number of dollars you need in order to start saving. Putting away as much as you are able to today will have a real impact on your retirement tomorrow, no matter how big or how small that number may be. Use time to your advantage.
2. TAKE ADVANTAGE OF QUALIFIED RETIREMENT PLANS
Two-thirds of Millennials work for an employer that offers some form of a retirement plan, yet only one-third participate in the plan***. This discrepancy can be attributed to a wide variety of factors. One of the most unfortunate, however, is a general lack of direct education delivered to eligible plan participants.
Let’s revisit the 15% of salary number which is suggested to produce a comfortable retirement. This may seem like an unreasonable amount to some, but it is important to understand a few of the features of a 401(k) plan before writing it off as unachievable. Most plans offer an employer match on the money you contribute. Today’s traditional Safe Harbor plan match offers 100% match on the first 3% of your compensation, and 50% on the next 2%. In summary, if a participant in this plan contributes 5% of their salary, the employer will automatically contribute 4% on top of that. This is essentially FREE MONEY. At the minimum, everyone eligible to contribute to a plan offering a match should be taking full advantage of this feature. In addition, the tax treatment of traditional 401(k) plans allow participants to save more and feel less of that effect on their take-home pay. For example, if a person earning $1500/paycheck contributes 10%, or $150 pre-tax into a 401(k), they will receive the company match of 4%, or $60 and they will also not have to pay taxes on the $150 they contributed. Assume the taxes would have been 22%, or $33. In this example, the participant is driving $210 dollars into their retirement account, but will really only be missing out on $117 of their take-home had they simply put it in their pocket. Most qualified plans also offer the option to contribute to a Roth account, which just means contributions are made with after-tax money. I recommend having a conversation with your financial advisor to determine which one of these makes the most sense for you.
For that one-third of Millennials who do not work for an employer that offers a qualified plan, there are other account options that incentivize retirement savings. The most common is an Individual Retirement Account (IRA). Similar to the 401(k), you can choose a traditional or Roth account based on your financial situation and preference. IRAs are constructed very similarly to 401(k)’s but traditionally offer more flexibility when it comes to how you are able to invest your money. This leads us to our final tip.
3. TAKE ENOUGH RISK
As we highlighted earlier, the most important ally Millennials have on their side is time. Due to this long time horizon, it is essential that their retirement assets contain enough potential for growth—most commonly labelled as risk. This can be achieved most effectively through mutual funds. With the majority of Millennials’ working lives ahead of them, any short-term market volatility has little effect on their long-term goals. The stock market has historically outperformed safer fixed income investments by a wide margin. In fact, if you invested $100 in US stocks in 1928, it would have grown to $382,850 by 2018. On the contrary, if you put that $100 into US bonds, it would have grown to just $7,308****.
Again, I recommend having a conversation with your financial advisor to ensure you are most appropriately allocated for your current situation.
Over the last decade or so, there has been a significant rise in the use of Target Retirement Date Funds. These can potentially be a great option for participants just beginning to save for retirement. The funds are designed to automatically adjust a participant’s allocation according to their age, meaning less of the responsibility falls on the individual. In the early stages of saving for retirement, it is more important to focus on asset accumulation rather than asset allocation, and electing to invest your contributions into a Target Date Fund could be one way to assist in doing this.
About the Author
As an associate and registered investment advisor at BWC, Rob Bier works with private clients, defined contribution plans and institutional accounts to asses and service their needs. His responsibilities include client asset allocation review and development, and designing and implementing employer-sponsored retirement plans. Rob is Series 65 registered and insurance licensed. He is also a candidate for the Level I Chartered Financial Analyst (CFA) designation.
About Beirne Wealth Consulting Services, LLC
Beirne Wealth Consulting Services, LLC (“BWC”) is a growing, privately owned, SEC Registered Investment Advisor with offices in Connecticut, Pennsylvania and Florida. BWC provides independent, fee-based investment management services and customized financial planning solutions. Our institutional business provides consulting expertise to defined benefit and defined contribution plans, endowments, foundations and non-profit organizations. Our private clients include high net-worth individuals and prominent families, many of whom bring complex wealth management challenges and multigenerational planning needs. For more information, please visit www.beirnewealth.com or give us a call today at 888-231-6372.
*Registration does not imply a level of skill or training.
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* Pew Research Centre http://www.pewresearch.org/topics/Millennials/