The cost of living in the U.S. is rising at its fastest rate in 10 years, consumer debt from credit cards to student loans is at an all-time high, and health care costs have been…
The cost of living in the U.S. is rising at its fastest rate in 10 years, consumer debt from credit cards to student loans is at an all-time high, and health care costs have been rising faster than the average annual income. And today’s millennials (ages 18 to 37) are feeling the pressure.
Millennials — now over a third of the U.S. population, a force shaping the digital age and driving the economy, the most diverse and most educated generation so far — are not without their challenges. Their top three financial concerns include taxes, managing debt and cost of health care, according to the fourth annual Advisor Authority study of more than 1,700 registered investment advisors, fee-based advisors and individual investors.
As the total amount of student loans continues to top $1.4 trillion, according to the Federal Reserve Bank of New York, millennials are saddled by more student loan debt than their predecessors — and may be dealing with the repercussions for decades to come. Millennials have hit pause on major life events like buying a home or saving for retirement because of what they owe. In fact, 44 percent do not invest because they are still paying off debt, and two-thirds of working millennials have nothing saved for retirement.
Coming of age in the wake of Sept. 11 and the Great Recession have impacted millennials’ financial concerns, investing habits and future earnings potential. They are reluctant to invest in the stock market and favor cash for long-term investing. They are proceeding with caution — and this aversion to risk may impact their ability to reach their future financial goals.
If you’re a millennial, you can better alleviate your financial fears and balance the competing priorities of your current needs and your future financial goals. Learn to control what you can and keep emotions in check with four simple steps toward smarter investing:
— Keep costs low.
— Maximize the power of tax deferral.
— Have a strategy to take on more market risk.
— Manage risk more effectively.
Keep Costs Low
You can’t control the market’s ups and downs. But you can control the costs of investing in the market. Fees and expenses matter. Every dollar that you pay for expense ratios, administrative costs, transaction fees and commissions, is a dollar that reduces your returns.
Today there are many low-cost mutual funds, exchange-traded funds and index funds — even no-fee ETFs and index funds. There are no-load funds that do not charge a commission. There are funds that eliminate transaction fees when you buy, sell or reallocate the investments in your portfolio.
Maximize Tax Deferral
For millennials facing a retirement that could last 30 years or more, it is never too early to start saving. In fact, the millennials in our Advisor Authority study say that saving for retirement is tied for fourth among their top financial concerns and is rated third among their reasons for having an advisor.
With the power of compounding and time on your side, you could start earlier, and invest less money — but in the end have more to spend. Say you start at age 25 and save $10,000 a year, including any matching contributions from your employer, and then stop 15 years later at age 40. By the time you retire at 65 you would have just over $1 million. Meanwhile your friend who starts saving at age 35 and who also saves $10,000 a year for the next 30 years, will retire with an estimated $840,000.
Employer-sponsored qualified retirement plans like 401(k)s are the perfect start: First, contributions use pre-tax dollars, to minimize your current tax bill and save more over time. Second, tax-deferred growth can also lower your taxes year-over year so you can accumulate more for the future. Third, many employers will match your contributions.
If you’re a high earner or a diligent saver, there could be one downside: annual contribution limits ($19,000 in 2019). To save more, consider additional qualified retirement plans, such as tax-deferred individual retirement accounts or tax-free Roth IRAs (contribution limits of $6,000 each in 2019).
Millennials of means can also benefit from investment-only variable annuities (IOVAs). Simple and transparent, with low fees, or even flat-fees, no commissions, no surrender charges, and hundreds of underlying funds, IOVAs can be one more tax-advantaged investing solution with virtually no contribution limits.
Take on More Risk
Witnessing the fallout of the 2008 financial crisis and years of ongoing volatility, millennials are skittish when it comes to the stock market. A report from UBS revealed millennials held almost twice as much cash as any other generation in their investment portfolios.
More conservative investments like bonds or cash can help protect your portfolio from market swings. But with today’s historically low interest rates, combined with the impact of inflation, it’s a losing proposition in the long term. Taking on more risk gives you the potential for more reward. While there is a chance of loss, you’re paid a premium in exchange, and research shows that over the long run markets rise.
But even when markets decline, those who stay invested for the long term can recover, on average, in 22 months. Pulling out to miss the market’s worst days, makes you more likely to miss its best days. And this leads the typical investor to earn one-third less than the market on average, according to a recent analysis by the Nationwide Retirement Institute.
Manage Risk More Effectively
As gridlock in Washington and global instability persist, all investors are facing face another bout of volatility. Have a proactive strategy in place to protect your portfolio against it. As Advisor Authority shows, millennials are somewhat less likely than other generation to rely on traditional diversification, and somewhat more likely to rely on liquid alternatives as their top solution. They are also somewhat more likely to use fixed index annuities, fixed annuities and market linked CDs.
To ride out the volatility and smooth out the price you pay for stocks over time, use the strategy of dollar-cost averaging, investing at regular intervals during highs and lows. And understand that market downturns can be buying opportunities, to invest in more shares at a discount.
These are moments in time of a long and productive financial life cycle. Given how many years they have ahead of them to save until retirement, millennials’ position is strong and time is on their side.