Recent studies have shown that Millennials are doing much
better than previous generations when it comes to saving money
and living within their means. One survey found that 70% of
millennials with full-time jobs started saving for retirement by
22 years of age, much improved from Generation X-ers and Baby
Boomers, who started saving at ages 27 and 35, respectively, on
However, even though they're saving money for the future, many
millennials are afraid to take any sort of risk with their
savings. This eliminates the effectiveness of the most powerful
investment weapon of all -- time.
The mindset of many millenials
The definition of a millennial varies somewhat, but is generally
accepted to mean those Americans from around 22 to 35 years of
age, or the adults in the workforce born after 1980. This is a
group of people who spent some of their college or early working
years observing the effects of the financial crisis.
Some had parents who lost a house or job, and saw firsthand
the devastating potential effects of inadequate saving, living
beyond one's means, and borrowing too much money. In fact, a
found that 80% of millennials say the recession taught them the
importance of saving money now.
And, many were left with a general distrust of the stock
market after having watched many people lose their savings, as
companies imploded during the crisis years. It should come as no
surprise, then, that one of the biggest misconceptions among
millennial investors is considering that the word "risk" as an
inherently bad term.
revealed that those ages 22 to 32 chose to put 75% of their
retirement savings in cash and fixed-income assets. So, while
they save well, millennials are hesitant to put any of their
money into stocks, with a lot of younger adults choosing to
invest in lower-risk, but lower-reward, investments.
Why this is bad
Many millenials just happened to get started at exactly the wrong
time. Some years, the market will go up, and some years it will
go down; but over any long period of time, stocks outperform any
other asset class. However, when an investing career starts with
volatility and recession, that person may develop a skewed
And, just like anything else, there's a right way and a wrong
way to buy stocks. With some good diversification and
risk-mitigation strategies, such as buying only low-volatility
dividend growth stocks, index funds, and blue chip companies,
stocks can create an excellent stream of income and growth that
can produce some amazing results over time.
Consider a millennial just entering the workforce who begins
saving $500 per month. Savings accounts pay very little interest,
so we'll assume the national average of 0.10% per year. The
highest-quality investment-grade corporate bonds pay around 4.3%
per year (for 20+ year maturations), so we'll use that in our
calculations. And, during the past 20 years, even including the
tech crash and the financial crisis, the S&P 500 has averaged
total returns of 9.3% per year.
As you can see from the chart below, the difference is not too
noticeable after just a few years. However, over a 30-year time
period, the differences in the returns from each of the three
types of investments is dramatic. The savings account would be
worth about $182,600, the fixed-income investment would end at
just less than $354,000, and the stock portfolio would grow to
$865,000, or almost five times the value of the savings account.
why it's important to rebuild millennials' trust in the market,
and get them to invest their savings wisely.
Long-term Performance Of Investment Types
Some solid investing habits could solve the "retirement
There has been a lot of coverage in the media claiming that a
"retirement crisis" is coming due to the uncertainty surrounding
Social Security, and the low retirement savings rate among
Americans. In fact, one-third of Americans between the ages of 30
and 49 have absolutely nothing saved for retirement. These claims
of an impending crisis do have some merit. After all, if Social
Security were to be drastically cut, people with no other
retirement savings wouldn't have a whole lot of options.
Millennials have already taken a step in the right direction
by becoming better savers. Now, with some progress toward a sound
investment strategy, the younger generation of American workers
could put themselves on the right path toward a more sound
financial future no matter what happens with Social Security.
How to get even more income during retirement
As we have seen, saving alone is not the only way to boost your
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1 Big Investing Mistake Many Millennials Are
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