Independent Thinking^®

Thinking about The Number

A lot has been written about Millennials but, as far as thinking about retirement, the jury is still out on the generation’s behavior.

Are Millennials living for today instead of thinking about tomorrow? Millennials, also known as Generation Y, are those born between the early 1980s to the early 2000s. Research to date generally indicates that Millennials delay settling down and buying a home, opting instead for one-of-a-kind experiences like traveling and investing in education. Homeownership, the traditional nest-egg investment, is now often regarded as expensive and risky, especially if the buyer could suffer a job loss or move to Silicon Valley to join a tech start-up. Older Millennials, currently in their mid-thirties and starting families, are beginning to test these generalities. Still, findings report that Millennials who do settle down and buy homes tend to buy smaller and less expensive properties than older generations.
 
Many Millennials report that they are living paycheck to paycheck. After paying rent, buying the latest necessary tech gadget, paying off monthly student loans and other fixed living costs, they have little discretionary income left to save for retirement. It’s important to note that research suggests that Millennials are actually paid less than their predecessors, in the lingering aftermath of the Great Recession.
 
Among Millennials with discretionary income to save, many seem to be sitting on the investing sidelines with cash, as they are anxious about the markets. That may be understandable, given our formative investing experiences, but are we now hurting our chances for a comfortable retirement? After all, Millennials probably cannot rely on Social Security or pension income.
 
So how can Millennials tackle what Evercore Wealth Management CEO Jeff Maurer describes on page 8 as “The Number” when we have so many other priorities? We asked our counterparts at Evercore, our clients, and clients’ children and grandchildren, and determined that, first, it’s okay to invest in yourself. Signing up for that continuing education class or hiking to Machu Picchu are invaluable experiences. There are very good reasons to save what we can, however. By factoring in the effects of long-term compounding, especially in a tax-deferred vehicle, investments can grow exponentially.
 
Consider the relative positions of a 25-year-old who starts to contribute $5,000 per year to a 401k and a 35-year old who has just now done the same, both with the intention of working until age 65. By that time, based on an 8% annual return, which is a discount to historic equity returns, the early saver’s 401k has grown to $1.3 million while the later saver’s is only $566,000 (and he or she has missed out on some important tax breaks in the interim). There is real value in starting early, as well as in proper asset allocation, diversification, and tax planning.
 
So, fellow Millennials, here is my advice to you: Put away what you can. We might not have Social Security on our side, but we do have time. Let’s use it to our advantage.