Each generation gets a little smarter than the last. Millennials (those currently age 18-35) understand the importance of saving for retirement at a younger age than their parents or grandparents did. The problem is that millennials have greater hurdles than any recent generation. Hopefully, you can help.
The first problem is student debt. Unlike earlier generations that had manageable student debt, this generation has relatively larger amounts of studend debt. In fact, a recent Wells Fargo study of those 22-35 years old found that 75 percent of millennials with student debt found it unmanageable.
Indeed, a paper by the St. Louis Federal Reserve reports that the “current national rate of serious delinquencies for student loans — defined as 90 days or more overdue — is about 11 percent, nearly double where it was in 2003. That number also could be considerably higher considering that many student loans are in deferment, grace periods or forbearance.”
If we get down the meat and potatoes of simply paying rent, here’s what millennials face:
When paying rent is a struggle, it’s hard to allocate funds for retirement investing. In fact, it’s not just rent that makes routine finances difficult to manage. As few Americans may realize, millennials entered adulthood as the U.S. standard of living started its decline.
The parents and grandparents of millennials generally experienced economies that were increasing the standard of living. Since the Great Depression, this is the first cohort to see a shrinking economic pie.
Among the 32 percent in the Wells Fargo study who expected to reach $1 million in savings, the median annual income was $53,000. This is higher than the median income for the survey participants overall: $39,100 for men, $28,800 for women. Miraculously, more than three-quarters of these “higher income” millennials are already saving for retirement.
Encouraging young investors to contribute to their company 401(k) is one of ther first pieces of advice an advisor should give to millennial clients. (Photo: iStock)
What can advisors do?
This generation will likely need more assistance with budgeting issues — stretching what they do have to include room for retirement investment. You may need to explain why they don’t need the latest iPhone.
Indeed, there may be other financial issues more pressing than saving for retirement. USNews.com concluded that the biggest financial concerns for millennials are:
- 55 percent — paying for school
- 47 percent — day –to –day expenses
- 28 percent — buying a home
- 22 percent — funding their retirement
- 20 percent — paying for health care
Advice you can provide:
Having health care coverage is most important. While a typical millennial may not see the need as they are young and healthy, getting hit by a bus is an accident that does not discriminate by age.
For those with dependents, having life insurance would come next.
Only once those absolute essentials are covered, can you offer advice for retirement investing:
- Get them to enroll in their company 401(k) account. Even as little as $100 per month gives them time and the power of compounding.
- If they don’t have a 401(k) at work, perhaps you are in a state that has enacted a state-based retirement plan for the private sector. About half of the states have such plans or will soon.
- Even if no formal retirement plan is available, the old systematic investing program offered by mutual fund companies is good way to establish an IRA.
- You may want to form an investment club for millennial clients. Not only is this a forum for contribution, it gets them involved in the investment process.
- Ask if the millennial receives monetary gifts from parents or grandparents. If so, have them ask if the giver can make the gift directly into their retirement plan.
You likely won’t earn much if any money from advising millennials, so consider it your pro bono contribution. And it doesn’t hurt to ask — can they refer you to their parents?