Millennials now comprise the largest living demographic
group in the U.S. Thanks to innovation and advances in technology, this first
generation of digital natives has enjoyed opportunities that were unimaginable
a few decades ago. Their demand for transparency, relevance and authenticity in
the way they interact with service providers has been the driver of
unprecedented change across industries, including — and perhaps especially —
financial services.
The millennial cohort, which includes ages 22 to 38, has
been diligent. They started saving for retirement at age 24 on average,
significantly earlier than past generations, and their rate of saving is
growing (see chart). Yet in spite of these advantages, they face far greater
financial hurdles than their parents.
An Economic Environment They Can’t Control
Millennials are better educated than prior generations and
would therefore be expected to earn more in a growing economy. The problem is,
economic growth is expected to decelerate for the next several years for a
number of reasons, including impact of the COVID-19 pandemic on global GDP
growth. Since 1926, the stock market’s average return has been around 8 percent
after inflation. Expectations for future returns are lower, however. This
outlook, combined with today’s low interest rate environment, is another factor
that could make it harder for millennials to build a retirement nest egg. Add
to that student loan debt of $33,000 on average for each millennial borrower
and the likelihood of higher taxes in the future (to pay back $3 trillion in
coronavirus stimulus and support an underfunded Social Security system), and
it’s easy to see that accumulating wealth has become that much harder.
Focusing on What They Can Control
Not surprisingly, a recent survey found that 73 percent of
millennials are “not optimistic” about their financial future. Most millennials
are aware of the challenges they face and want help. That’s good news for
advisors.
The key to working with millennial clients is to start with
an understanding that the challenges they face are substantially different than
those of older clients. From that vantage point, focus on changing the things
that are within their ability to control, such as:
Saving more of their paycheck. While 15 percent may be a
good starting point, some experts recommend saving as much as half of their
paychecks for retirement if the goal is to retire at age 65. While many now
expect to work beyond that age, 43 percent of millennials hope to retire
earlier.
Working longer and claiming Social Security This combination
one-two punch expands the number of wealth accumulation years while maximizing
the payout potential of Social Security.
Investing in their skills throughout their lifetime. Rather
than seeing college graduation as the finish line, plan on continuing education
throughout one’s career in order to remain flexible and marketable. That could
include grad school, but also classes, programs and certifications aimed at
keeping skills current or pivoting in new, more promising directions over the
course of a lifetime.
Prioritizing wellness to stave off expensive health setbacks
later in life. Healthcare can be a significant expense in retirement. It will
cost around $142,000 on average in today’s dollars to cover an individual’s
medical expenses in retirement. Staying healthy can reduce that amount.
Considering longevity insurance strategies, including
deferred annuities and long-term care insurance, to transfer the risk of
outliving an asset base to a third party.
More than any generation in the last 50 years, millennials
face an uncertain future marked with challenges that older clients haven’t had
to face. There is a tremendous opportunity for the advisor who can connect with
millennials on their own terms and help them navigate a pathway forward.
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