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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:
- Save. Adopt a savings habit by cutting out unnecessary costs. See our post 25 Ways to Save Money And Feel Good About It.
- 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.
- 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.
- 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.
- 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.
- 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
- 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.
- Millennials will have more opportunities for employer-based 401K plans, even if they are part-time workers, interns, or independent contractors.
- High usage of smartphones are providing millennials with access to money management capabilities, notably fintech transactions and information.
- Millennials with retirement and taxable accounts are using financial professionals for years.
- 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.
- 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.
- 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,
- 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!
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.