A new report by investment fund giant on millennial retirement savings habits Vanguard dispels many of these myths. Millennials are doing just fine, thank you, when it comes to retirement savings. Automatic enrolment in retirement plans has helped improve the retirement savings of adults under 35. Target-date funds have also helped millennials keep retirement savings plans on track.
These funds automatically shift the weight of portfolio allocation more towards fixed income than equity investments as investors near retirement age and become more risk adverse. The biggest myth that millennials are investment laggards was blown up. Millennials have more money in their retirement funds than Generation X at the same age.
The millennial lifestyle and life plan poses challenges to the traditional retirement investment model. It has pushed demand for retirement savings products that deliver higher returns and sooner, such as annuity- and insurance-linked products that are tied to the performance of stocks or other underlying securities. These products have a place in the young investor’s portfolio, but history has shown that they are not likely to outperform the value of savings and compound interest.
Advice For Millennials
Investment advisors can help millennials in these ways:
Recognize the value of savings and compound interest – $100 of extra savings a month will add up to close to $10,000 in 40 years when you are ready to retire at age 65. Taking your iPhone as a cost savings centre, this savings could easily be achieved by cancelling a few app subscriptions you do not use or use lightly, going for the cheaper iPhone and plan, and cutting down your bandwidth use.
Take full advantage of retirement plans – Another Vanguard reports on the auto savings generation finds that less than half of 401k investors are taking advantage of employee matching funds.
Allocate more money to stocks – Younger investors can afford to take some additional risk in exchange for higher equity returns. Millennial portfolios are more diversified than those of their parents, and this diversification helps to reduce risk. Target-date funds, as mentioned above, are helping millennials gradually shift out of stocks as they age.
Pay off debt – A balance should be achieved between investing and paying off debt. The money paid on interest rates on the debt has a high opportunity cost. This money could be in a savings account earning compound interest.
Despite the mischaracterization in the press, it appears that millennials are tightening their savings belt and getting what they want.
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