personal finance

Millennials Are Financially Jinxed, but Time Is on Their Side

Suffering from recession fatigue, this generation nevertheless can’t afford to shy away from stocks. Here’s how Millennials should prioritize their retirement savings goals.

We Millennials have had a rough go. Despite being the most financially responsible and educated generation, our employment and income have not really kept up with expectations – ultimately making us one of the unluckiest. What gives?

For starters, many of us began adulthood in the aftermath of the Great Recession. And now, we’re grappling with the COVID-19 recession, too. With this history of bad economic luck, many Millennials are simply focused on basic financial survival – navigating the tightening labor market, paying down debt and keeping bill payments on time. However, despite the challenges from repeat rounds of tough times, it’s still important for Millennials to keep retirement savings in their sights.

Don’t Be Afraid of the Stock Market

After living through two major stock market crashes, many Millennials are leery of “throwing money away”’ by investing in the stock market. In 2019, BlackRock found that 65% of Millennials’ wealth was held in cash – the highest of any living generation. That’s bad news for growing long-term wealth, as cash tends to get very low returns – in fact, savings accounts can regularly lose value in real dollars!

Though volatile, stock returns generally tend to be higher than returns on other investments. There has never been a 20-year period when the stock market ended down – including 1988 to 2008 – and even in major crashes, the recovery tends to be fairly quick. By 2011, the stock market made up for the 60% market decline of the Great Recession, and just this year, we’ve already seen the market regain the initial losses from the severe drop at the beginning of the COVID-19 pandemic.

Financial advisers commonly recommend Millennials designate about 85% to 90% of their retirement portfolios in stocks (and, more specifically, in mutual funds or exchange-traded funds (ETF) that invest in stocks). Ninety percent may seem like a lot, but keep in mind that retirement investments are supposed to be for decades. People who invest regularly and have solid emergency savings in place can ride out the crashes of these stock-heavy portfolios. And, in the long run, they end up with much more wealth. To get the best picture of what your own asset allocation needs are, consider consulting with an adviser.

Realize Time Is on Your Side

For this generation, there are more working years ahead than in the past. Any Millennial who starts saving for retirement in 2020 – even the oldest ones – will still start saving for retirement sooner than the average American, according to a survey by Morning Consult. And, with at least 25 years until conventional retirement age, even relatively small savings contributions can amount to a comfortable retirement. Combined with Social Security, starting early and saving often can build over time to maintain a decent standard of living throughout one’s lifetime. For people who start at 30, the same savings each year would ultimately produce about twice the annual income for life compared with waiting until age 40. So, don’t delay – start today!

Finding the Right Investment Account

Wealth growth can be maximized by contributing to tax-advantaged accounts. A common recommendation is to prioritize saving in the following order:

  1. Contribute up to your employer’s match in your 401(k) or other qualified retirement plan. The average Millennial currently makes about $47,000 a year and, according to the Bureau of Labor Statistics, the average 401(k) matches 3.5% of gross salary after the employee contributes 5%. So, the average Millennial in the average 401(k) would contribute $2,350 and would be matched $1,645 from their employer.
  2. Max out your Health Savings Account (HSA). Many people with high-deductible health insurance – a common plan among Millennials – can contribute up to $3,500 (in 2020) in an HSA. Those HSA contribution limits increase to $3,600 in 2021. HSAs are meant for health care expenses, but many financial planners believe HSAs may be one of the best places to save for retirement as well.
  3. Max out your Individual Retirement Account (IRA). Whether you choose a Roth or traditional IRA, you can save up to $6,000 (2020 and 2021) per year with special tax advantages. Roth IRAs in particular have become popular accounts with Millennials, and are often more advantageous for younger people than are traditional IRAs.
  4. Fund your other goals. Many Millennials want to save for a home down payment, a car, a child’s education, or some other large expense. Generally, it is best to save for these goals outside a dedicated retirement account. Taxable brokerage accounts and savings accounts are usually good options, and, when planning for a child’s education, parents should consider a 529 College Savings Plan.
  5. If you’ve still got money left over, max out your 401(k) or other qualified retirement plan. If all of your other financial planning goals are spoken for, you can consider contributions up to the maximum of $19,500 (2020 and 2021).

Choosing to prioritize your retirement savings or other goals is a personal decision, so be sure to figure out what works best for your situation. But despite how rocky the last decade has been for many of us, it’s important to keep an eye toward planning for the future, even if in small steps – because tomorrow always turns into today.

About the Author

Matt J. Goren, Ph.D., CFP®

Assistant Professor of Financial Planning, The American College of Financial Services

Matt J. Goren is an Assistant Professor of Financial Planning at The American College of Financial Services who focuses on the interplay of personal finance and psychology. In addition to teaching and developing content, he provides strategic consulting on financial literacy initiatives and hosts a personal finance radio show, Nothing Funny About Money, which was named 2018’s most outstanding consumer financial information resource by the AFCPE.

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