A Beginner’s Guide To Life Insurance

A Beginner’s Guide To Life Insurance

Life is a series of risk management, said a wise oncologist recently.

Death happens and we can’t control our retirement from life.

To better manage our risks in life and provide some protection against loss, we need insurance–auto, health insurance, disability and life insurance.

While car insurance is mandatory (except in New Hampshire) and health insurance was mandatory under the Affordable Care Act (until 2019), life insurance is not required.

Let me give you some of my thoughts here

If you are young, married, and have children or are planning to grow your family, life insurance is a must.

Term life insurance is a better option than the cash value policies. Some find the cash value policies attractive for their lifetime nature, savings and investment elements but I feel term life values offers more value with generally lower rates than the cash value options.

How much life insurance coverage do you need?

Although there are rules of thumb of some multiple times your annual salary to figure out what amount of life insurance coverage you should target, there is a danger with that simplicity.

Are you using your annual salary that is your starting salary at age 25 or 30 years old? More relevant is to consider what your family plans  and what costs are you trying to cover?

If you are like most your young people, you likely don’t have a long range plan with all the pieces in place but you take some educated guesses.

You can also use some insurance calculators and you are likely going to find that the difference in your monthly cost between a $1 million and $2 million policy may be the cost of one non-lavish dinner out.

If it is a fixed amount, you find it easier to pay more as you earn more. Do what is better for your family and your piece of mind.

“Insurance is the only product in the world that both the seller and buyer hope is never actually used.” Author Unknown


What is life insurance?

A life insurance policy is a contract with a life insurance. The contract is typically bought by the primary wage earner in a household.

The purchaser of the policy and now insured makes premium payments to the insurance company in exchange for a lump-sum payment known as death benefit to the beneficiaries upon the insured’s death. The death benefit is typically income tax-free.

Who needs life insurance?

If you are young and unmarried you probably don’t need life insurance now. However, if  you have a loan that has your aging parents as guarantors, you want to get an insurance policy to cover your debts.

If you are young, married and without children, you may not need to buy life insurance but it will be cheaper, and especially if you may have a mortgage or student loans that someone else such as your spouse will have to face in the  unlikely event of your death.

If you are young, married and have children below 18 years, you definitely need a life insurance policy. If you have a workplace life insurance policy, check what coverage amounts you have. There is a good chance you don’t have enough and need to get a bigger policy. At the very least, if you need a life insurance policy, and you do, im my opinion, as you will see below, term life insurance is the way to go.

Older households that are married with children need life insurance. The median age for owning a life insurance has increased to 48 years in 2013 from 42 years in 1989. This is not surprising as people are marrying and having children later.

The impact life events that often motivate purchase of a policy are highest when having children (43%), buying a home (35%) change in financial situation (33%) and marriage (28%) according to surveyed buyers in a Deloitte study.


There are two main types of life insurance: Term Life and Permanent Life


Term life insurance provides financial protection for a specific time period, usually 10-30 years. The longer the time frame, the higher your premium costs will be.

Traditionally, the premium payment for term insurance remains the same throughout the coverage. Other term life policies may have premium pricing changes at predetermined intervals, with rates rising with age.

Term life is generally cheaper than permanent life insurance and usually provides the value and flexibility.

Term life insurance is intended to replace lost potential income during working years.

In the event of the insured’s passing, the family’s goals can still be met such as paying off a mortgage, paying other debts, paying for your children’s college and keeping a business running. As mentioned earlier, the death benefit is not taxed.

Term life insurance can be extended beyond your purchased time frame but at higher rates and is not guaranteed if you developed a serious health problem.

Diabetes or heart disease may run in your family and so added protection is desirable.

Your best bet is make sure your policy comes with a non-cancellable guaranteed renewable term insurance provision. Check to see how many times your insurer will allow you to renew your plan as well as an age cap.

Term life insurance is better but consider permanent life insurance for lifetime coverage

Term life insurance does not have a cash value growth potential like the permanent life insurance. Frankly the savings you earn between the lower priced term life versus whole life or universal life insurance can be invested in a low indexed S& P 500 fund and keep pace or exceed the growth of the permanent life insurance options.

Permanent life insurance: whole life insurance and universal life insurance.

These options have cash values that pay benefits upon the death of insured and have a savings/investment element.

The insured, while alive may surrender or cancel the policy for cash value, withdraw or borrow from the insurance company against the policy. The beneficiaries do not have this ability but presumably the insured is doing something to benefit his or her dependents.

Many holders of these cash value policies do not hold the policies through the death benefit. It could be that your children have grown, your mortgage is paid off, or your have pressing needs for the cash.

Whole life is more popular than Universal life

Whole life insurance, the more popular of the cash value policies, is designed as lifetime coverage. The premiums are paid with fixed amounts and are typically more expensive than term life.

Whole life has a savings component and may accumulate tax-deferred investment money over time. There is no need to renew for coverage to remain in effect  though you may be making fixed payments throughout your life.

Some of the whole life policies allow for limited pay until a certain age such as 100 years, or allow for modification adjustments to the components, such as paying lower amounts in your early years.

Universal life insurance policies may be more flexible. The owner of this policy may choose to pay a smaller or larger premium.

Like whole life, the policy is generally designed for lifetime coverage. Universal life insurance provides both a death benefit and building cash value with greater growth potential based on a rate of return paid by the insurance company.

This policy may require annual fees to net a certain return. I generally do not believe insurance policies are not adequate as an adequate investment strategy. The universal policy is often seen as part of estate planning strategy.

Cash value policies are better for those who want lifetime coverage, have plenty of cash to invest and want to use your life insurance policy as more diversification. Be aware that you may owe taxes at the ordinary tax rate for the difference between the amount of your policy premiums and the cash proceeds you receive when cashing out your policy. Consult your accountant to be sure.

Some statistics from LIMRA, about life insurance reflect some common misperceptions:

60% of all people in the US were covered by some form of life insurance in 2018 either through an individual policy or through their workplace. That percentage has remained at 60% in the past few years but a significant drop from 77% household  life insurance ownership in 1989.

Buy Both Term Life and Whole Life

There is a strong argument for families to combine these policies. While term life is more affordable, it is not permanent coverage like whole life insurance. If you are looking for $1,000,000 worth of coverage, you may want to consider buying $500,000 worth of term life coverage at a lower premium while adding $500,000 worth of whole life.

You may have purchased life insurance early in your lives when you had one child living in an apartment. However, lives change and you now have three children and live in a sizable house. Your compensation is also considerably higher than it was previously. You now can afford permanent protection and can add whole life to your term policy. 

Life Insurance: 1965 vs. 2017

Looking back to 1965, Americans bought 27 million life insurance policies compared to 28.04 million policies in 2017 according to Statista.

That is only 3.9% growth in purchased life insurance policies in 50 years when our population grew by more than 40% from 1965 to 2017.

Part of the greater appeal of life insurance in 1965 may be explained by the lower life expectancy of 70.21 years (blended for women and men) versus 78.6 years in 2017. The drop occurred for both term life policies and the cash value policies associated with permanent life insurance explained below.

However, the decline in cash value policies is nearly 50% since 1989. In the Federal Reserve Bank of Chicago’s study, face value of term life grew to $353,288 in 2013, up 126% from $155,996 face value in 1989.

Face value of cash value life insurance grew also but at 43.1% indicates far less appeal.

The study indicates significant changes of socioeconomic and demographic trends with the African American households at lower income accounting for a relatively higher percentage of ownership as compared to white households.

Almost 90% of consumers think a family’s primary wage earner needs to own life insurance, a big gap from the 60% who actually own a policy.

More than a third (35%) of households would feel the financial impact if the primary wage earner died.

20% of people who have life insurance say they do not have enough.

It is important to point out that in a separate LIMRA survey on employment based life insurance ownership reported that 108 million people have life insurance through a group plan surpassing 102 million people who own individual life insurance plans for the first time.

The potential problem is that those who do have the work plan often as a free work benefit may be minimally covered  as low as one times the employee’s salary or only $25,000. That is well below the recommended industry standard in the 7x-10x salary for deeper coverage.

 Life Insurance and Millennials

44% of Millennials overestimate the cost of life insurance by five times the actual amount.

Millennials say they need information and education, explaining that they are uncertain about the different types, amounts and qualifying for coverage.

Millennials tend to research life insurance products online more than other generations but would consider buying from an insurance professional.

Only 1 in 3 Millennials and Gen Xers have their own financial advisors versus 40% of Boomers that have a primary financial advisor.

Buying life insurance is more complex than other products. There is a huge opportunity for insurance providers to provide clear information on their websites along with simplifying the underwriting process for new buyers.

Half of all consumers say they are more likely to buy life insurance if it is priced without a physical examination. While that exam is a key factor, it is among other considerations that are less known, such as credit histories, driving records, hobbies and lifestyle.

For example, certain activities like scuba diving, recreational flying, racing, and bungee jumping could impact insurance costs like smoking and alcohol.

61% of consumers don’t buy life insurance policies at all or increase their coverage because they have other financial priorities.

Those priorities differ generationally. 49% of those 65 or older and 60% of Millennials cited paying for expenses associated with Internet, cable, and cellphones over purchasing more insurance. 29% of Millennials pointed to saving for vacations as their priority while 23% of Gen Xers’s priorities were going to the movies, shopping or eating out over buying life insurance.

According to Federal Reserve Bank of Chicago in their 2017 study, the major reasons to buy insurance were:

  • 51% want to cover burial and final expenses.
  • 34% to replace lost income.
  • 26% to pay off mortgage.
  • 24% to transfer wealth to the next generation.
  • Only 14% cited buying life insurance was for supplementing retirement income. This last point may help to explain the mystery of the decline in life insurance ownership since 1989 when a higher percentage of our population were covered by workplace pensions but not yet the increased retirement options such as 401 K plans, IRAs and Roth IRAs which were introduced starting in 1998. Households have to prioritize their needs and retirement planning usually places high up on most people’s lists but are challenging for many.

Your future family plans play a big role in your life insurance policy

I believe that everyone needs a life insurance, especially with those with dependents.

I prefer term life insurance with an adequate amount of coverage to cover all of your debts and college planning and for enough years in the plan to support your family.

The rule of thumb is 7x-10x your annual salary but it may not be adequate for you and your family. If you are using a multiple of seven times your annual salary of $65,000, is $455,000 enough to cover your anticipated expenses?

Is it appropriate to use that multiple on your starting level salary which is expected to grow along with your lifestyle. The difference between a policy

What are your plans for the future? How about some peace of mind

Your life insurance policy should be able to address your family’s plans.

If you are like most young people, you don’t have all the pieces of the puzzle but you can make some educated guesses.

You need to consider whether you will be buying a house, where will you live, how many children are you planning to have?

Do you have student loans and other debt that need to be factored in?

What do you want the plan to cover and for what time frame?

You should use an ample life insurance plan so you can have peace of mind for the long term. There are insurance calculators you can use. You are likely going to find that the monthly difference between $1 million and $2 million policy coverage equates to about one non-lavish dinner out that month.

Have you bought a life insurance policy or considering buying one? Have you figured out your needs based on some long range expectations for your family? What is your experience in this often complex are? We would like to hear from you!












Can You Answer These 6 Questions Correctly? My Husband Couldn’t!

Can You Answer These 6 Questions Correctly? My Husband Couldn’t!

April is Financial Literacy Month!

Being well versed in financial literacy should be among our top priorities. To be better acquainted, see how you do in a short quiz below. The answers will follow with explanations of important financial concepts. Financial literacy is recognized formally in April but these skills are required for everyday money decisions.

To make informed family decisions, you need to tackle what it means financially. Basic financial concepts are essential to your short term and long term planning so you can accomplish your goals. For example, when buying a car, your family should consider alternatives such as a used versus new car; lease, loan or purchase; and what that means in related interest payments. Purchasing a house has its own complexities. On the other hand, we make day-to-day financial decisions when shopping for groceries, paying bills, using our credit cards, investing or saving for retirement.

How we handle our money has consequences. While some of us do a better job than others, we all have weaknesses. I am not just referring to buying a $5 latte. It’s more than that. Improve your finances in small steps through a greater understanding of financial literacy. Take the financial literacy quiz then we will review the following concepts:

Important Financial Concepts You Need To Know:

  1. The Magic of Compound Interest
  2. Inflation
  3. Inverse Relationsip Between Bond Prices And Yields
  4. 15 Year Vs. 30 Year Mortgages
  5. Debt And Interest Payments (or compound interest in reverse)
  6. Diversification Strategy
  7. Rule of 72


 But First, Let’s Discuss Saving Money

They tend to spend more than they earn. You can slow your spending by understanding your costs better and create your own budget plan. Pick off easy places to save money. Eat out less often and reduce shopping impulsively.

When shopping, I have often experienced cognitive dissonance, a common post-purchase behavior. I have that feeling of unease or guilt after I purchased something. Did I really want it or did I mistakenly think I needed it?

My Husband, The Impulsive Shopper

My daughter, Alex came into our bedroom one evening, peered at two shoulder bags I had bought,  still residing in their respective store bags from two different stores.

Daughter to mom: “Why are you not using them and why did you buy two at the same time?”

Mom to herself, silently: “Because your father, the impulsive buyer, came along and said, ‘why not buy both, Linda?’ and your mom listened to him for a change.”

So we all have our own quirks and need to have better saving habits.

5 Goals When You Are Saving Money:


1. Emergency Funds

The emergency fund is a great place to start. Aim for six months’ liquidity to have a buffer for your essential costs: food, rent or home payments (mortgage, utilities and such). Invest these savings in a bank account that has largely cash-equivalent securities. For more on emergency funds, please read here.

2. Save For Retirement Funds

Putting aside money for your retirement accounts is important. It is less painful when done early and automatically through your workplace or your own accounts. Read our blog on saving for retirement as early as your 20s.

3. Spend Within Your Means

Spend less than you earn by having a monthly budget to better understand your costs. According to FINRA, only 40% of Americans spend less than their household income. See our post on creating a budget. Review and tackle some of your costs with money saving ideas.

4. Avoid Debt And Pay It Off

Pay your monthly credit bills in full, not just the minimum amount. Only 32% of Americans pay their credit cards in full. The majority of those who don’t pay the balance in its entirety, face a high borrowing rate (15% on average) that will stretch out the number of years you can pay down this costly debt and increase your total borrowing costs.

5. Shorter Mortgage Terms Are Better

When taking out a mortgage loan for your home, consider the 15 year versus 30 year terms. You will make higher mortgage payments but by cutting the term in half, your total borrowing costs are significantly lower.

We need to actively manage our money to the best of our abilities. Money is a critical part of our lives and can impact our peace of mind.

The 2008-2009 recession was a tough experience and exposed many to the hardships of poor financial decision-making. Many people lost jobs, often both adults in the same family, making it difficult to pay off debt.

Take the financial literacy quiz down below.

While April is designated as Financial Literacy Month, a greater emphasis on financial literacy emerged after the Great Recession.

The first national study of financial capability of American Adults began in 2009, resulting in “The National Financial Capability Study” (NFCS). This was a project of the FINRA Investor Education Foundation.

Greater Awareness of Financial Education

Among the study’s accomplishments is the creation of greater awareness of the need for financial education for adults through a six question test including a bonus question. The questions use the most basic math skills.

These questions are used to evaluate financial knowledge, covering basic concepts of economics and finance that may be found in our everyday lives, along with calculations related to interest rates, inflation, risk, diversification and compound interest.

FINRA has published data from the NFCS study explaining results which I share at the end.

The Federal Reserve also adopted these questions for the 2016 Survey of Consumer Finances and collected respondents’s ratings of their own level of knowledge. Not surprisingly, those at higher income and with higher levels of education did better on the test.

My husband, the spender in the family is not always the best decision-maker when it comes to money management. As a result, he had some trouble with the questions below. He feels he is excused becaause he is an attorney. Many lawyers choose the profession because they are poor in math.

FINRA Financial Literacy Quiz

Can you answer the following questions?  Comprehensive answers will follow.

Question 1:

Suppose you have $100 in a savings account, earning 2% interest per year. After 5 years, how much would you have?

Choice A  More than $102

Choice B Exactly $102

Choice C Less than $102

Choice D Don’t know

Question 2:

Imagine that the interest rate on your savings account is 1% per year and inflation is 2%. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?

Choice A  More

Choice B The same

Choice C Less

Choice D Don’t know

Question 3:

If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?

Choice A  Rise

Choice B Fall

Choice C Stay the same

Choice D No relationship

Choice E Don’t know

Questions 4 and 5  are True or False Questions


Question 4:

A 15-year mortgage requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.



Don’t know

Question 5:

Buying a single company’s stock usually provides a safer return than a stock mutual fund.



Don’t know

Question 6 is a Bonus Question.

Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?

Choice A  Less than 2 years

Choice B  2 to 4 years

Choice C  5 to 9 years

Choice D  10 or more years

Choice E Don’t know

Each of the above questions deal with important financial concepts.

The Magic of Compound Interest

The first question deals with the all important compound interest principle, the key to growing your wealth. By putting $100 in a savings account earning 2% interest per year, you are earning interest on interest along with interest on your the principal amount. In this question, you will earn more than $102.

To better illustrate the power of compound interest is the classic question, “what would you rather have, a penny that doubles everyday for 31 days or $1,000,000?” And the answer is ….the doubling penny which yields $9,737,418.24 more than the one million dollars!

Now, it is not reasonable to assume a 100% annual growth rate for any investment annually, let alone on a daily basis.

However, if you save $2,000 per year in an investment account early in your lives at a more reasonable 8% return, and save an additional $500 per month on top of that, over a 35 year period, you could accumulate $1.1 million. Try using a compound interest calculator.

The power of compounding interest, linked to the time value of money, will benefit you the most if you  invest early and let your earnings accumulate and grow rather than withdraw money from your accounts.


The second question is asking about the effects of a 2% inflation rate that is outpacing the 1% interest rate on our savings account. This  means you would have less in one year than today (Choice “C”),  by 1 % in buying power. You would need have a 2% savings rate to stay even.

Inflation refers to a general rise in prices on goods and services that we buy. A 2% inflation rate reflects a stable economy and is usually measured by the Consumer Price Index (CPI) and other price indices.

Measuring Prices

CPI measures the weighted average of a basket of consumer goods and services, such as food, transportation, clothing, medical care and energy. Medical costs, in particular rise faster than the average inflation and plays havoc with those depending on those products and services.

Unless we get at least a 2% raise in salary or can earn a return that keeps pace with inflation, we would fall behind in our purchasing power.

If Mary earns a salary of $60,000 and gets a $1,000 annual raise, or 1.7% increase, she will be slightly behind if inflation is 2%. However, if inflation grows to 6%, and she gets an additional $1,000 a year later, her $62,000 salary is still behind as her cost of living will outpace her compensation.

Inflation and other economic indicators affect our daily lives. Read this post on why we need to understand the Fed and how they impact interest rates and money in our financial lives.

How Do We Feel the Effects of Inflation? 

We experience higher prices in food at the grocery store. Food costs have been rising faster than the inflation rate for years for a variety of reasons. Higher oil prices increase shipping costs, weather conditions like droughts cause shortages in some products, and simply our desire for healthy and “organic” food drive up demand and prices for certain foods.

Remember the egg shortages because of bird flu epidemics? This led to higher prices for eggs as well as more people turning to vegan diets.

Have you noticed the shrinking jars of spaghetti sauce at your grocery store? Thirty two ounce jars became 26 ounce jars, then more recently, 24 ounce jars, with the smallest jar selling at the same price as the 32 ounce jar at the blink of eye? That is inflation, my friends.

When Interest Rates Rise, Bond Prices Fall

The third question asks about what happens to bond prices if interest rates rise. Bond prices will fall. This is an important question for bond investors. Bond prices have an inverse relationship to interest rates, meaning that if interest rates rise, bond prices will decline.

If you are a bond investor, or own bonds as part of your diversified investing strategy, you need to understand the role of interest rates on your investment portfolio.

Treasuries, Muni’s and Corporate Bonds

As interest rates rise, newer bonds that are being issued by the US Treasury, state and local governments (ie municipalities) and corporations will come to the market with higher interest rates.

The prices of older bonds you may be holding in your portfolio will likely to go down as a result. This happens unless you own inflation-indexed bonds where the principal is indexed to inflation and protect the holder (a separate topic for another day).

All bonds have interest rate risk, even US government bonds which typically do not do have default risk because of its superior AAA rating as compared to the varied ratings for munis and corporate bonds.

15 year versus 30 year mortgage loans

The fourth question assumes interest rates are the same for 15 year and 30 year mortgage loans. In reality, they are usually different rates. In a true/false question, it poses whether a 15 year mortgage requires higher monthly payments but results in lower total interest over the life of the loan compared to the 30 year loan. Yes, this is correct and is often the reason many consumers prefer the shorter time frame.

This is true for all loans, including car loans, business loans and even credit cards.

When you spread out your time table for paying back your loan, you may be paying a lower amount but you are paying more interest for the longer period. If you can work it into your budget, opt for the shorter time frame, to get rid of your debt load faster.

It is compound interest working in reverse to your detriment.

About half of consumers pay only the minimum amount due by their credit card company. Paying the minimum amount may be attractive since you avoid late fees. It also won’t impact your credit score. However, you are increasing your borrowing costs and making it more difficult for you to be debt-free.

Diversification strategy

The fifth question addresses a very important topic: diversification with the True/False statement: Buying a single company’s stock usually provides a safer return than a stock mutual fund. FALSE!

A diversification strategy is the best way to spread risk in your portfolio. A stock market fund is usually managed by a portfolio managers with experience and expertise. While mutual funds charge fees, there are a number low fee index funds that are attractive and diversified for the average investor.


A True Story 

I once knew someone who was fairly successful and ran his own portfolio, which was dominated (more than 90%) by one stock for a long time.

He owned a few other investments but was comfortable maintaining a non-diversified strategy and he did not have to pay fees to anyone else.

That one stock was Countrywide Financial, a company that at its peak in the early 1990s was the largest mortgage originator of single-family homes in the US. Countrywide Financial was heavily exposed to subprime mortgages (better known as toxic mortgages later on).

Countrywide Financial was called the “23000% stock” by one major magazine for the tremendous returns it generated from 1982-2003. Countrywide and other lenders were providing loans without full credit background checks and without requiring down payments.

The Collapse of Countrywide Financial

In the summer of 2007, Countrywide revealed its enormous liquidity problems as mortgage delinquency rates soared, especially those subprime mortgages held by families with poor credit histories.

The company literally avoided total collapse by jumping into the arms of Bank of America in January 2008 at a bargain basement share price.

Imagine if the one stock you owned in your multimillion dollar portfolio was Countrywide in 2008? Clearly, you would have wished you had been diversified!

Rule of 72

Bonus question 6 asks you to suppose that you owe $1,000 on a loan and the interest rate you are charged is 20% per year, compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?

For a moment, ignore the compounding of interest.

The Rule of 72 is a simplistic formula used to determine how long an investment will take to double given a fixed rate of return.

The formula for this rule is 72 divided by interest rate or 72/20 and equals 3.6 years.

Under the compounding interest method, the amount takes a bit longer, or close to 4 years. As mentioned earlier, it is always key to use the magic of compounding in your favor and for money growth, not debt. For other financial ratios like the Rule of 72, read this related post.

So how did you do on the quiz? Probably Better Than My Husband!

There are a number of financial literacy quizzes to test your personal finance know-how but in this short version, it does highlight a number of key areas to know.

FINRA provided results from its study with the national average at 3.16 correct answers out of 6 questions. It also provided a scores by state, with Montana having the highest score of 3.78 versus Texas registering the lowest score of 2.81.

Clearly, we all need to do a better job at financial education. That provides us with the greatest opportunity to grow our wealth.

Oh yeah, I forgot to mention that my husband, the spender, only answered three (!) questions correctly.

Remember my spendthrift husband, Craig? His financial habits were poor, resulting in a low score. Craig is a smart guy except when it comes to money. His mismanagement of money can be frustrating. Read more about that here in this post about 9 Ways To Avoid Financial Infidelity here.

Final Thoughts

Financial Literacy may be recognized in April but learning personal finance skills should be a year-round goal. Taking the quiz to test your financial literacy know-how is only the tip of the iceberg. You can learn how to handle money better at any time. Challenge yourself to improve your financial health.

How did you do on the test? What are some the financial literacy tools you use to better your financial situation. We would appreciate any thoughts, feedback or comments you are willing to share.










Millennials And Investing: A Study And Six Tips

Millennials And Investing: A Study And Six Tips

  Millennials are not all alike.

This is probably news to no one yet the amount of myths permeating this age group are numerous. They account for the largest generation at 35% of the US labor force and have been so since 2016 according to Pew. As such, they have growing assets ripe for wealth accumulation, stock market participation and retirement planning to hopefully secure a promising financial future.

An online survey of 2,828 Millennials was conducted by FINRA Investor Education Foundation and CFA Institute was published in October 2018. The study measured attitudes on investing among three millennial segments–those with no investment accounts or non-investors, those with retirement accounts only, and those with taxable investment accounts. Most of the latter group also owned retirement accounts.  The study debunked 7 myths about millennials and investing and provided constructive implications for millennials and those financial businesses that court them with financial products.

Before the survey findings, here are my 6 Tips for  Millennials:

  1. Save. Adopt a savings habit by cutting out unnecessary costs. See our post  25 Ways to Save Money And Feel Good About It.
  2. Set up an emergency fund. You need to to set up an emergency fund designed for liquidity by investing in cash-equivalent securities.  This fund should cover at least 6 months of unexpected necessaries. If you have outstanding debt, pay your highest cost debt first. Once the fund established and you have a plan to reduce, your savings should be invested to maximize your well-being.
  3. Use your workplace retirement plan. If you have access to an employer-sponsored plan and your employer provides “matching contribution”, make sure to take advantage of that. If you don’t, you are leaving your money on the table.
  4. Set up your own retirement account. If you don’t have access to an employer-sponsored retirement plan, set up your own IRA/ Roth IRA accounts. If you are self-employed or are a small business owner, consider setting up a SEP IRA. The point is you need to save for retirement as early as you can. Consider saving for retirement a form of investing.
  5. Invest, invest, invest. You should invest the rest of your savings in low cost growth diversified funds, such as in small, medium, or large market capitalization stocks or in a S& P index fund that mirrors the market and its returns. There are a lot of good choices to consider, whether you prefer saying in the US market, or diversify to potentially faster growth global markets. You could look at Fidelity, Schwab and Vanguard options for a start. You can use a financial professional to discuss the options or consider alternative robo-advisors, such as Betterment. Se our post How To Start Investing: A Guide.
  6. Women millennials, in particular, need to become more confident in investment decision-making. My own experience as an equity analyst in a male-dominated Wall Street environment was often a challenge. Make challenges your opportunities. Women investors are often less risk-oriented than men, and adopt buy-hold strategies. Nothing wrong with that if you are diversified. See our post,  Women and Money: 7 Steps To Better Control Your Finances.



8 facts about millennials and investing

  1. Millennials are not alike and those millennials that have retirement accounts and taxable accounts are ahead of those non-investor millennials that do not yet have either.
  2. Millennials will have more opportunities for employer-based 401K plans, even if they are part-time workers, interns, or independent contractors.
  3. High usage of smartphones are providing millennials with access to money management capabilities, notably fintech transactions and information.
  4. Millennials with retirement and taxable accounts are using financial professionals for years.
  5. Millennials need to be better educated about minimum asset amounts needed (they underestimate) for a financial professional and fees (they overestimate) they will be charged by their advisors.
  6. Millennials have cost-effective alternatives to financial advisors that could amount to over 1% of their managed assets, if they are doing DIY investments such as ETFs, or robo-advisors that provide more personalized guidance in addition to their digital platforms.
  7. Only 3% of Millennials used robo-advisors according to the study, and only 16% were “very interested” in learning more about these advisors. Other emerging products, such as cryptocurrencies, investment crowdsourcing and socially responsible investing also received relatively low interest from Millennials. More financial education is needed,
  8. Women millennials trail men millennials in all aspects of financial education they were tested on and women tend to be more conservative about their financial abilities. This is consistent with a separate study that looked at women investors across three generations (including Gen Xers and baby boomers) compared to men.


Here, I want to review some of the findings and expand our facts about millennials in investing and saving for retirement. Read on..

Given the trends in Social Security and life expectancy,  Millennial retirement in 2046 when the oldest millennials turn 65, may not be realistic. 

1.The non-investors are less likely to believe they can retire at all. This group with a median annual  income of $35,000, pointed to the biggest barriers to investing as insufficient savings, not enough income and paying off debt. This group has more financial challenges than the other two groups. Compared to the other groups, only 44% of these non-investors are full-time employed compared to the higher percentages of 87% for those with retirement accounts and 79% for those with taxable accounts and largely hold retirement accounts too. However, 34% of the non-investors will likely start investing in the next five years.

2.Those millennials with retirement accounts only have a $54,000 median income and 32% of this group plan to begin investing outside of their retirement accounts in the next five years. Paying off debt accounts for their biggest barrier to investing.

3. Clearly, the strongest group financially were those that have taxable accounts. They generate $73,000 in median income and 31% of this group started investing before they turned 21 years. They cited individual curiosity and parents/family as  influencers to start investing. According to the Pension Rights Center, only 23% of all US workers participate in a pension plan, and most of those that do, work for the government at federal, state and local levels. It will be hard to rely on Social Security as a retirement vehicle in the future. Even if it remains with federal funding, Social Security retirement only amounts for about one-third of your income, so retirement planning is a must.

Financial education should help those millennials that cite income and debt as challenge and provide a path to investing.

Millennials need more opportunities for employer-based 401K savings education, even in part-time work, which could prompt non-investing millennials begin to invest. Increasingly, more part-time employees, interns, and independent contractors are eligible to be offered 401K plans, if they are at least 21 years of age and worked 1000 hours in one year. The Pension Rights Center’s statistics show that 33% of all  part-time workers in the US do have access to 401K but only 17% are taking advantage of the plan.

In the Millennials and Investing study, only 52% of the lesser employed non-investors have an employer that offer a retirement plan. The other two groups of the study were in better shape with higher percentages offering the retirement plan, with  90% or above participating. One hopeful sign for those working in companies that do not offer 401K plans is that there are more financial companies, like Betterment and Human Interest that are providing lower cost 401K plans for employers to offer for their employees. Human Interest even has 401 Ks designed for small companies and startups, not typically the kind of companies that offer retirement plans. With a tighter labor market, this an important perk for employers to provide upon hiring.

Millennial financial education should be offered to the different mindsets of non-investors, retirement-only investors, and taxable account investors. They are different places in their education, resources and experience.  Home buying falls much lower (23%-26%) on all three millennial groups as compared to 45% for GenXers and 46% for Baby Boomers, when they were at age 27,  as a financial goal. The reverse occurs when consideration of “saving enough for retirement” as a financial goal for the two better situated millennials groups  with retirement accounts and taxable accounts at 39% and 46%, respectively as compared to their older generation counterparts.

Financial education programs directed at millennials and others have been expanding at many different levels, particularly since the Great Recession. Whether it should be taught at schools and colleges, in a workplace environment, through not-for-profit organizations, in books, blogs is not a question. It should be made available broadly and at early ages for school children.Over 90% of millennials own smartphones with ready access to money management capabilities. About 80% of millennials use their phones for transactional fintech transactions while 90% of millennials use their phones for information on fintech.

Financial professionals can expect to be an important resource  for many millennials. The study recommends that financial professionals’ outreach to millennial non-investors should address perceived expenses and needs.   About 41% of the millennials  that have retirement and taxable accounts do work with a financial professionals for several years but have mixed opinions about working with their financial professionals, citing it is as too expensive. I don’t think this is very unusual for anyone using a financial professional, particularly if you look at the declining market performance in 2018, the year the survey was taken. That said, the average fee for assets under management (AUM) for high-net-worth clients are typically 1%, but a recent study reported that the true all-in-cost for financial advisors could be 1.65%. There are so many investment opportunities for millennials  to consider.

There are so many investment opportunities for millennials  to consider. According to a recent Schwab study, millennials say 42% of their portfolios are currently in ETFs, and 56% of millennial investors have replaced their individual securities with ETFs. The average ETF carries an expense ratio (its fee) is 0.44%, meaning it will cost you $4.40 for every $1000 you will invest. Nevertheless, millennials and other investors have access to financial advisors, that is human advisors, through some of the largest robo-advisors and legacy providers with robo-advisor platforms. Schwab Intelligent Portfolios, its robo-advisor business, is a cost effective option, with or without a human element, if you have $5000 to invest and will not charge an advisory fee. Wealthfront, a robo-advisor has a $500 minimum and its fee is 0.25% fee on all assets.  Betterment, among the largest of the robo-advisors, offers portfolio management and personalized guidance on retirement and homebuying, but requires a $100,000 minimum. Their fees are 0.25% of assets for their digital platform up to 0.40% of assets for personalized advisory services. Vanguard provides full access to their professionals for $50,000 minimum and a 0.30% fee.

I would expect these types of offerings will broaden and become more competitive, benefitting millennial users in particular as they seek your assets. Besides robo-advisors, other emerging products and services that were included in the study were socially responsible investments, cryptocurrencies, and investment crowdfunding. Cryptocurrencies were used more than the other products, while socially responsible investments received the most interest. Investment crowdfunding was used the least. This is not surprising since it had been limited to accredited investors though its appeal will likely widen.

The study suggests that millennials need to be educated more on the fees and minimum amounts needed to get financial professionals. In the survey, they underestimated the investable assets needed to work with a typical financial professional at only $10,000 or less while the fees they would be charged be 5% or higher. Combining with the sixth myth, the millennials need opportunities to be educated about emerging financial products and services, including rob-advisors. The study disclosed that only 3% of millennials in the study used robo-advisors, but more surprising, only 16% were “very/extremely interested in using/investing” robo-advisors, and 46% were “not very/not at all interested in using” robo-advisors. Juniper Research indicated that roboadvisors will grow significantly, 70% through 2022, and would be key for wealth managers being able to reach millennials as clients. A Schwab report said 60% of Americans will be using robo-advisors by 2025. Clearly, millennials need exposure to the disruptive digital platform and cost efficient benefits of using robo-advisors which use similar algorithmic programs similar to program trading used by hedge funds and other institutional investors that have had disruptive impacts to trading in our financial markets since its visibility in the October 1987 crash.

The study also studied certain subsegments of  Millennials, further proving this is not a homogenous group.  These subgroups are: millennials from rural areas, female millennials, trailing millennials in the younger age (22-29) group, and African-American millennials,  further proving the initial statement that millennials are not a homogenous group. All of these subsegments are more than worthy of their own post. In this study, women millennials trail men millennials in several areas. Women millennials have lower percentages as “a taxable investor”, “being employed full time”, “in their confidence in decision-making about investing”, and “in reaching key financial goals”. The female millennials registered lower percentages in optimism toward the economy or about financial markets. They cited their lack of knowledge as a barrier to investing and say they need more knowledge.

The data from this study is not surprising as women often are more conservative about their abilities. I don’t have a study to point to but aren’t women often more comfortable than men in asking for driving directions? Kidding aside (and I am not fully kidding!), FINRA Financial Capability Insights reported that women consistently score lower than men on financial literacy measures, and this gender-based gap may negatively impact women’s long-term financial well-being. This gender gap, where women trailed men over a six year period was regardless of generation. Positively, while the gender gap for boomers and gen Xers stayed the same from 2009-2015, the gap for millennials narrowed driven by a decrease for millennial men and a slight increase for millennial women. Women rated their own financial knowledge lower than the men, consistent with the millennial study. Still, greater financial education is needed for all millennials, and for our population in general.

How would you rate your financial knowledge in investing, financial products and services? Would you consider more personal finance education and where would it be best for you? Are you a millennial and what topics are you interested in? We are interested in reading your comments!

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