It might not come as news that we Millennials receive little respect for our financial skills. Having grown up in an era where the focus regularly fell on protecting individuals’ self-esteem (e.g., participation trophies), I can attest we often received reminders about our uniqueness and why we should always follow our passions.
Those constant reminders to follow our dreams usually came at the expense of receiving prudent financial advice, which often fell to the wayside as it might interfere with pursuing whatever made us happiest. Understandably, the goal of setting aside 25% of each paycheck never received the same fanfare as building the next billion-dollar smartphone app or disrupting some stodgy industry.
While following your loftiest goals certainly serves as a laudable notion, after a decade more or less in the workforce, some Millennials feel more like Wile E. Coyote foolishly pumping his legs in the hopes of catching the pesky Road Runner and yet getting nowhere fast. Deep down, we do not want to give up because we have made it so far, but we also need to recognize a more practical drive: preparing for that retirement still seemingly forever away.
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Doing so requires us to reconcile our passions with our pocketbooks. While I do not advocate abandoning what makes you happy, I do call for some pragmatic choices to set yourself on a sustainable path toward retirement, even if it exists far in the future. This article highlights four common retirement mistakes Millennials have made with money.
1. Prioritizing Repaying Student Loans Over Saving for Retirement
If you have not heard the news, our generation faces an inconceivable level of student loan debt to the tune of $1.6 trillion and growing. Many Millennials have this burden cloud their judgment on how best to handle their finances. Many prioritize paying off their student loans, often to the detriment of other investments.
For those lucky to land a job with employer-provided retirement options, many will offer perks like a 401(k) match, HSA funds or possibly even a pension. As a general rule of thumb, when your employer offers you free money with minimal strings attached — like requiring a minimum contribution from you to receive it — you should strongly consider this opportunity. Take advantage and lay claim to this money before worrying about student loan debt if your budget can swing it, even if this requires sacrifices elsewhere as this money will compound in your favor.
Beyond these matching funds, you will need to assess where you can earn your best return for your money. If you pay somewhere above 6% interest on your student loans, you might consider whether you should refinance student loans to get a much lower-cost option. However, even if your rates are in this range or less, you would still likely be better off investing that money aggressively for the long term rather than paying off your loans earlier.
Even investing an extra $250 per month from age 22 through 67 at an average annual return of 8% will result in $1.25 million. Now, imagine saving $1,000 per month (not counting whatever money your employer throws in for your 401(k) on top). That nets you a $5 million nest egg. That’s something you can retire on down the road, and it’s why you should consider setting aside even small amounts now with the goal of bumping up that contribution as quickly as possible.
2. Investing Too Conservatively for Their Age
Last year, research from Vanguard showed a lack of risk-taking on the part of Millennials as compared to older generations. The study found Millennials have a higher likelihood of referring to themselves as conservative investors, despite significant time on their side to overcome any losses seen in riskier investments like equities.
The study suggested a lasting impact from the scars of the Great Recession and seeing market turmoil during our formative financial years combined with job losses and portfolio declines from our parents. I do not dispute this trend, but my Millennial counterparts seem to have adopted an enduring risk aversion ever since.
While I do not advocate relying on margin investing as an attempt to add more risk, I would point out the best place to invest money for long-term wealth creation remains the stock market. Holding money in diversified, low-cost equity investments for long periods of time is a strategy that has demonstrated remarkable wealth creation for those who have done so over the last few decades.
Verify that the low-cost funds perform in line with a broad market index and let the investments ride while steadily adding over time with dollar-cost averaging. To diversify this investment portfolio, also consider investigating whether real estate investing might be a good fit for you as well. When managed wisely, real estate investing can result in generous tax benefits like tax long-term capital gains treatment on 1231 property, MACRS depreciation and other tax shields.
Regardless of your preferred asset class, investing in riskier assets like equities and real estate while young stands to provide better odds of retiring comfortably. As things currently stand, Millennials tend not to invest as early as they should, and they then choose not to invest as aggressively as their counterparts did at their age. This is a concerning combination for my generation.
3. Taking on Too Much Risk by Going After Costly Credit Card Rewards Bonuses
Anecdotally, I have heard numerous examples of friends beginning to explore the world of credit sign-up offers as a means to leverage their current spending for financial gain. For those with prudent spending habits and a strong control on their finances, this represents an invaluable opportunity to harvest rewards for yourself without changing your spending behavior.
However, while I recommend this path to those who can manage this feat successfully, some people overdo it. Credit card churning, or the rapid application and completion of credit card sign-up bonuses and cancellations prior to paying an annual fee, has become increasingly popular in my generation.
Most cards come with initial minimum spend requirements extending into the thousands of dollars over short time periods. Something like $3,000 in three months is not uncommon. While my wife and I took advantage of one credit card sign-up offer that provided us over $4,000 in value, we planned ahead to bunch spending we needed to incur regardless to satisfy the requirement.
For those who get in over their heads, attempting to qualify for multiple credit card offers, it’s easy to get behind on payments when something goes awry. Only those people able to handle the minimum spending within their established budget should consider pursuing credit card sign-up offers as a way to monetize their existing spending. For those who overextend themselves financially, credit card rewards programs can derail even the best-laid retirement plans.
4. Planning to Work Forever
Many Millennials worry they will never retire. Depending on whom you ask, traditional retirement may be out of reach for many in our generation. While society may have the flexibility to adapt and accommodate an extended working life beyond retiring at 67, planning for such an outcome isn’t optimal — especially if it’s you who has to work longer.
While life spans increase and health quality improves, this does not necessarily equate to a need for working longer if accounted for appropriately. To overcome this outcome, many simply need to heed the advice from this article and use the following as their credo: “Invest early and invest often.” Adopting this simple guiding force will allow Millennials to turn in their farewell letter someday.
With all this said, living vital, healthy lives and working in roles we love offer us the greatest sense of purpose and meaning. Hanging on to jobs we enjoy might be admirable, but having a ticket to the retirement dance and actively choosing not to go is far better than not having one at all.
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