What does it mean to be young? It depends who you’re asking. Victor Hugo once said that forty is the old age of youth, and fifty the youth of old age. Others would argue that your age does not necessarily determine your youthfulness. There’s some truth to that. Some people start behaving like old hags as early as their thirties, while others can remain young “in spirit” not only in middle age, but well into retirement. Yet for marketers, brand specialists, and anyone trying to capture a piece of our wallet, being “young” is usually defined systematically, based on the year we were born. From that point of view, anyone born no earlier than 1980 is considered young, today.
When it comes to youth and economics, the word on everyone’s lips these days is Millennials. They are defined as people who are reaching or have just reached adulthood in the early 21st century. It’s a label that sticks best with those that were born between 1980 and 1995, and constitutes a formidable set within the US population. According to the Pew Research Center and the U.S. Census Bureau, millennials surpassed Baby Boomers as the US’s largest living adult generation, sometime in mid-2019 (the latest population estimates available). Thanks, in part, to immigration, the US millennial population is still growing and will peak in 2033, at 74.9 million.
Everyone brims with theories (and complaints) on what makes millennials tick. For some, they’re professionally unmotivated and unfocused kids, who’ve been overly-pampered by parents afraid to make the same mistakes as the previous generations. For others, millennials are just as idealistic, confident, ambitious, and achievement-oriented as any generation that came before them. When it comes to millennials’ investment preferences, however, you tend to see a lot less granularity around that subject -- except for the unfair generalization that most of them are fickle retail investors and crypto addicts.
In order to shed more light on the differences between millennials and the previous youth generations (i.e. Baby boomers, Generation X, etc.), it would only be fair to ask some behavioral questions, such as:
· Are millennials facing the same employment challenges and aspiring to have the same life in adulthood as previous generations?
· Have any recent shifts in today’s economy altered millennials’ financial goals?
· Are millennials mostly focused on a self-directed approach to investing, or are they willing to turn to expert advice like most other generations?
To get to the bottom of this, let’s look at some data…
I’d like to start with some really encouraging news. The inaugural Bank of America Preferred Insights: Hindsight is 20/20 Personal Finance Report conducted with 2,000 people, in late 2020, is teeming with hints of optimism in the way young people approach their careers and financial independence. In this survey, the millennial cohort was a bit affluent and had investable assets between USD $50,000 and $1,000,000. The data suggests that fairly affluent millennials have a noticeable streak of entrepreneurship and independence.
Compared to older generations, today’s youth is more likely to open up with close friends about sensitive issues such as home buying and healthcare. In my view, the fact that millennials are quite forthcoming about their finances suggests that they will eventually seek professional help -- if they’re not already doing so.
The 2020 Winter Better Money Habits Millennial Report has even more encouraging data. It found that nearly 75% of millennials are saving. That’s 10 percentage points higher than the last time the report was published in 2018. Moreover, some millennials are saving considerable sums of money. 24% of those surveyed have stashed away $100,000 or more in savings, compared to 16% in 2018.
If this information about millennials is not encouraging enough for you, keep in mind that youth does not stop with them.
There’s an even younger, and possibly more significant, cohort making its way towards adulthood.
Market analysts have baptized the group as Generation Z, and it takes-off precisely where millennials end. Generation Z includes young adults that are simply too young to be labeled as millennials, and were born between 1996 and 2016. Euromonitor expects that, as this group matures and enters the labor force, it will surpass the spending power of millennials in a little more than 10 years from today.
Take a look at how this will unfold…
And now for the not-so-encouraging news….
According to Bank of America’s 6th Annual Millennial Home Improvement Survey, millennials’ economic prospects and financial prospects have negatively shifted, in part, due to the COVID-19 pandemic. One clear example of this is how COVID has decreased the likelihood that professionals in their 20s and 30s will purchase a home, soon.
In recent years, the percentage of millennials buying homes had been consistently increasing. However, in 2020, the growth became uneven. For older millennials (age 33-37), homeownership increased, while younger millennials (age 28-32) bought less homes. Many even moved back with their parents. Bank of America estimates that the pandemic has delayed millennials’ independence from their parents by about 5 years. I suspect this can only mean that they will take a bit longer to get involved in serious dating relationships, settle-down, start families, and start “adulting” when it comes to their investment decisions.
In another survey conducted on behalf of Truist for adults aged 23-39, the data shows that there’s a wide gap between what millennials aspire to do with their money and what they’re actually doing to achieve those financial objectives. On the one hand, millennials are definitely thinking about their future. 86% of respondents had established personal financial goals for the next 5 years, and 80% of them planned to retire by relying on personal & retirement savings (75%), Social Security (60%) and inheritance (25%).
On the other hand, millennials unfortunately seem grossly unprepared for meeting the challenges of investing and retiring head-on.
For instance, only 40% of those planning to retire had a retirement account. Moreover, 69% of all respondents had not even created an emergency fund. In terms of planning, the survey found that 41% of millennials who didn’t have a financial plan did not know where to start, and 31% did not know whom to trust. In my view, the savings & investing challenge for millennials is clearly not a lack ambition, but rather taking practical steps to achieve their goals.
Regardless of what camp you’re in -- the pessimists who worry that our youth has no business investing and will ruin the future, or the optimists who firmly believe that the new generations are just fine and hold the key to a better world – there’s one thing that we can probably all agree on: When it comes to investments, Millennial and Generation Z professionals will need to be a lot more self-reliant and resourceful than their parents ever were with retirement planning.
That’s because most private employers have already eliminated pension plans. What’s left are 401(k)s, 403(b)s and other employer-sponsored plans where employees (not employers) are the primary savers and expected to manage their own financial destiny. But there’s a problem with this arrangement: defined-contribution retirement plans such as 401(k)s are not mandated by law in many countries. In the US, for instance, employers are not required to offer any type of retirement savings plans to employees. As a result, close to 46% of private sector workers (57 million) in the US do not have access to a retirement plan through their employer. This reality is bound to impact younger and aspiring workers the most because they’re likelier to join the gig economy or end up working for a small company. And while entrepreneurship, working in small companies, and the gig economy may provide unique work cultures, plenty of mental stimuli, and flexibility, those arrangement are also more unstable and precarious than traditional employment at more established firms.
To complicate matters more, COVID-19 has thrown an extra wrench in the investment and retirement predicament of aspiring and young employees. With a global shift in the employment landscape – including hybrid, work-from-home, and work-from-anywhere employment plans – Millennials and Generation-Zers entering the labor force are bound to experience changes in everything from health benefits, to commuting benefits, and retirement benefits. As the more cost-efficient trends of remote work and employment through third-party outsourcing gather strength, there’s no assurance that 401(k) plans will be included in future employment contracts -- even for workers toiling at larger corporations in everything from IT to investment management. This puts a bigger burden on young employees to plan, manage, and safeguard their wealth on their own.
My two cents for the young: A little bit of planning can go a long way.
The details of which go a little bit like this…
As unglamorous as it may seem, if you’re a Millennial or Generation Zer navigating through the early phase or growth phase of your career (20s and 30s), start with a bit of budgeting and an emergency fund. Once those two things are in place, it’s probably safe to address your retirement accounts. If your employer is already providing you with a 401(k), 403(b) or SEP, evaluate the pros & cons of maxing-out on your annual contributions. If you don’t have a retirement account at your job, consider opening up your own (i.e. individual IRA or Roth IRA). Don’t worry if you’re low on savings, even a few hundred bucks can go a long way. It’s critical to prioritize a retirement account over your online brokerage account. But, if you’re not comfortable with storing that much away in savings until your late 50s, try starting with a conventional brokerage account.
Before you’re ready to fund any of your account(s) and start investing, stop and think real hard about your risk tolerance. Being young usually means that you can take on more risk, but your age should not be your only risk consideration. Evaluating home purchase opportunities, exploring insurance options, and looking into education investment plans is great, but that will usually be the cherry on the cake in your plan, once you’ve covered the other points and are feeling more like a “mature” Millennial.
Staying competitive in the labor market, saving for the future, and remaining disciplined with investments has always been very tough for all generations. But the degree of sacrifice and the burden for our youth can be milder if the older generations help point-out some of the potential pitfalls, and provide a bit of guidance to help them stay motivated. Encouraging them to (realistically) imagine the lifestyle they’d like to build in their 40s and 50s, rather than focusing on a retirement date that seems one-hundred years away, is one great way to do so.
I’m not a father of one, myself, but based on the data we’re seeing, as well as the pulse I’m sensing from reading and interacting with Millennials and Generation Zers, it seems that they hunger for a chance to prove all of their critics and skeptics wrong. Although they might not always collectively use the same voice, I feel that, at the individual level, many of them want the world to know that they’re here to stay… Not only that, they’re here to thrive and leave a distinct mark on the world. For many of us less-youthful folk out there, connecting and understanding Millennials and Generation Zers is no doubt challenging and can even be maddening. But these idealistic, tech-savvy, altruistic and ambitious youngsters are our future, nonetheless. And that’s why there’s never been a better time for all of us, including financial planners, to eat a bit of humble pie and help them meet their investment challenges head-on.