By Scott Wohlers
VP, Riverplace Capital Management, Inc.
Entitled, lazy, self-centered–these are just a few stereotypes to describe the generation born between 1981-1996, more commonly known as “millennials.” From their lattes to avocado toast, a broad picture has been brushed when it comes to this generation and how they deal with personal finance and investing. Millennials are facing challenges that few other generations have had to deal with. Some of the challenges they face include the worst financial crisis since the Great Depression, a slow economic recovery out of the financial crisis, stagnant wages, a historic rise in the cost of education, housing costs at an all-time high, and crushing student loan debt levels. So, with all these challenges, how does investing and saving for retirement fit in? In addition to the previous challenges listed, you will not find a personal finance class taught in high schools or even college curriculums; education in personal finance and investing for millennials is either self-taught or learned from parents. However, what if their parents have gotten it wrong or the advice that worked for them no longer works today? As an investment advisor and millennial facing these same challenges personally, I hope to outline a plan to help you navigate and understand the importance of a disciplined investing approach.
Apart from our health, planning for retirement and investing are, in my opinion, the most important things in our lives. How do you invest when you’re paying record levels in rent, saving to buy a house, or managing student loan payments every month? According to the Census Bureau, this year the national median rent hit an all-time high of $1,008 per month. Between 1996-2016 rent has climbed 20% faster than the overall inflation rate, according to the Wall Street Journal. Millennials were told throughout their education to first graduate high school and then to get a college degree. Many of them entered the workforce during or immediately after the financial crisis. It made it difficult to find jobs in the fields in which they earned their degrees, yet they still had student loan debt to pay. According to the New York Fed, four in ten recent college grads are presently in jobs that do not require a college degree.
This generation will also face student loan debt like no other. The New York Fed states that student loan debt has quadrupled since the start of 2005 to $1.48 trillion. That is faster than any other form of household credit during that timeframe. On top of that, wage inflation for the past decade has remained mostly flat. So, this millennial generation is facing higher debt levels right out of college, living costs rising much above the levels of inflation, and flat wages. Also, pensions are scarce in the private sector. If an employer provides a retirement plan, it will typically be a 401(k) plan or a 403(b) if you work for a non-profit institution. These plans are layered in fees and costs before an investment is even made. They are limited in scope and it can be difficult to know what to choose without any investing knowledge or experience. There typically aren’t financial advisors readily available to give guidance, and if there are, they are behind a 1-800 dial-in number. This generation is less likely to trust an advisor from a big box firm because they believe they are just being sold. They witnessed it growing up and they saw what happened during the financial crisis. With this level of distrust in the large financial institutions, retirement plans that are layered in fees, and a lack of knowledge of investing, where should you turn?
If you speak to most well-known and respected investors, there is one theme that remains true, and that is discipline. This also applies to this generation when it comes to saving money for the future and planning for retirement. Even with the challenges millennials face—from higher debt levels and living costs, to stagnant wages— there is one thing we do have, and that is time. Time is on our side when it comes to investing. The difference in starting to invest in your twenties and thirties versus your forties or fifties is dramatic in what it could cost you. For example, if today your employer offers a 401(k) plan that matches 3% and you contribute just $150 a month at the age of 23, and your employer matches that amount, it makes your total monthly contribution $300. Assuming you continue to contribute the same $300 until you turn 65 and get an average market return of 8% (the average historic return in the stock market), you will have earned over $1 million by the time you’re 65! Compare that to starting at age 40 and increasing your contribution to $500 a month; you will only earn $475,000 by the age of 65.
Again, the key here is discipline. Finding a way to get the $150 a month at age 23 can be challenging. However, it is feasible and can be achieved. For those of us who aren’t in our early twenties, but have been contributing to a 401(k) plan or other retirement vehicle, how do we know if we are making the best investments? This is where finding the right financial advisor is essential. Important things to do to establish a strong foundation are as follows:
- Start early! When given the opportunity to participate in an employer-sponsored plan, participate.
- Make sure you fill out your W-4 correctly; this affects how much money you get each paycheck.
- Keep expenses low and flexible. Use technology (apps on your phone) available to help track expenses and evaluate where you can reduce spending.
- Determine your investment strategy; if you don’t have one reach out to a fiduciary advisor to help you establish one you’re comfortable with.
- Understand that investing is a long game; don’t get caught up in the day-to-day fluctuations in the market.
- Use downturns as buying opportunities; you are buying the market “on sale.” Remember investing is a long game and time is on your side.
- Utilize your financial advisor and ask their advice on any financial considerations, such as buying a house or consolidating debt.
- Stay the course when it comes to your investment strategy; remain disciplined. When you try to “time the market” you end up potentially costing yourself dearly.
As a group, millennials really don’t like “sales” people or the feeling of being sold a product or service. They want to see the value in the proposition and how it impacts them personally. This is not the case for everyone, however, but when looking at trends, it does seem to be the case with millennials. That’s where finding the right advisor can be a challenge; how do you find someone who isn’t just “selling” you a product or service? The great part about being in this situation is you get the opportunity to meet with and interview as many advisors as you’d like.
When interviewing potential advisors, ask them questions about their values and make sure they align with yours. Find an advisor that will be a true partner with you as you grow—one who can help educate you in investing and personal finance. Choose someone who will truly be a partner to you as you navigate through debt management, and who will help you formulate your unique financial plan. In searching the landscape of varying types of financial advisors, typically you will find it is fiduciary advisors that meet these criteria. A fiduciary financial advisor is an investment professional who is licensed with the United States Securities and Exchange Commission (SEC) or state regulators. Fiduciary advisors are important for clients because what distinguishes them from other investment advisors is that they are legally required to put clients’ interests ahead of their own. While there are many capable financial managers in the market, I highly recommend working only with a fiduciary advisor to ensure that your best interests are legally protected.
Our generation will face unique challenges. However, by starting to invest early in life, and by ensuring a consistent and disciplined approach to investing, financial freedom can be achieved. Finding the right partner to help you navigate this complex terrain is essential, and it is important to make sure the investment advisor shares your values. The right fiduciary financial advisor can help you understand investing as well as answer personal finance questions. Even though millennials face manifold financial challenges, if we hit them head on and make the right decisions from an early age, we can overcome the hurdles in front of us. In my opinion, investing and building wealth for the future is essential to overcoming these hurdles and building a successful future.