July 24, 2017
The mistake stems in part from a mistake many people make when they are young: they put off saving for retirement because retirement seems so far away. But for many millennials, they are exacerbating this problem by making a big mistake when they do start saving: they are avoiding the stock market. And over a lifetime, it could mean they lose out on a lot of money.
The biggest reason many are avoiding the stock market is because they came of age during the financial crisis and the housing correction, and the resulting Great Recession. They watched their parents or other family members struggle with the market downturn and other negative economic consequences during this time. And it left a deep impression on them. Not wanting to put themselves in this position, they are avoiding the stock market, and keeping their money in savings accounts instead. Only one in three Millennials say they invest in stocks, according to a Bankrate.com survey. And six in ten have less than $10,000 saved for their post-working years, according to Ramsey Solutions’ 2016 Retirement in America Survey.
Anxiety is not the only reason. Early in their careers, millennials are also more cash strapped than previous generations. Student loans and other education-related debt are playing a role. Median education-related debt is $19,978, according to a 2016 Wells Fargo Millennial Study. College loan balances for those between ages 18 and 34 are nearly triple what they were in 1989, according to the Census Bureau. Additionally, the Great Recession meant that many millennials took longer to get their careers off the ground.
Millions of dollars, Tom. A recent NerdWallet study compared the financial outcomes of three paths for a 25-year-old today: investments in stocks, placing money in a savings account, and keeping savings in cash. The study assumed a salary of $40,456 a year – the current median income for that age, annual raises of 3.7% to keep up with inflation, and a savings rate of 15 percent of annual income.
The findings are eye-opening. If this 25-year-old invested in stocks, they could potentially accumulate $4.57 million over 40 years, assuming a hypothetical 10.96% annualized rate of return, before adjusting for inflation and after accounting for annual investment fees of 0.70%. If the same individual kept their money in a savings account, they would have just $1.27 million after 40 years, assuming a 4.6% annual interest rate, before adjusting for inflation. That is a difference of $3.3 million dollars! And if this same individual had kept their money in cash, they would end up with $563,436 saved over a 40-year period, over $4 million less than if they had invested in the stock market.
The study used 40 years of inflation data, Standard & Poor’s 500 returns, and three-month Treasury rates — a proxy for historical savings account rates — to determine the potential accumulation in each scenario.
First, I would simply tell them to listen again to the numbers I just mentioned. While the stock market does have corrections and periods of volatility, the long-term record of the stock market is astounding. The difference between a stock portfolio and a savings account can mean millions in lost returns.
Second, I would tell them not to be intimidated by the fact that investing can seem risky or complicated. It can seem big and complex, but there are resources out there. If your company offers an employee retirement plan, reach out to your human resources department for assistance. If you do not have that option, you can reach out to a financial advisor. Ask questions, and do your own research. At first it may seem hard to tackle, but you will feel more comfortable as you learn more about it.
Finally, I would tell millennials to start investing now. Inertia is a powerful thing. If you are not investing now, remaining un-invested is an easy habit to fall into. Do not do it. Start investing, even if the amounts are small. It can likely pay off in a big way over the long term.
The hypothetical investment return mentioned is for illustrative purposes only and is not indicative of any specific return you may receive from a particular investment. The data assume investments over a specified period at a hypothetical annual return rate, assume the reinvestment of all income, and do not account for taxes or transaction costs. The information on this page is provided for educational purposes only and is not tax, legal, financial planning or investment advice. Neither the information nor any opinion expressed in this section constitutes an offer to buy or sell any securities or advisory products.
The information provided is general and is not information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. You should not regard this information as a substitute for the exercise of your own judgment. Investing involves risk.