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Double whammy: Why Millennials are doomed

USA TODAY USA TODAY 14/10/2016 Jeff Reeves
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A common observation about Millennials is the generation’s penchant for spending on experiences over goods like cars or homes. In fact, a recent Harris Group study found 72% Millennials plan to focus on  “experiences rather than physical things” in their future spending.

That has led to some hand-wringing about a young generation spending too much at bars and restaurants, but it’s not really spending habits that are the biggest problem for Millennials in general. The most significant financial challenge facing 20-somethings and 30-somethings is a structural problem in how they will be able to save and invest for retirement. 

Saving for a distant retirement is always a hard concept for younger Americans, who are more inclined to live in the now. And the slow death of pension plans over the last few decades has made things even harder.

But in addition to these typical hurdles, Millennials also face a mathematical double whammy of lower lifetime earnings and lower investment returns that will make their challenge even more difficult.

On the income front, consider a Yale economist’s study of earnings from college grads, which showed “large, negative wage effects to graduating in a worse economy.” In some cases,  they saw as much as $100,000 less in cumulative earnings over the next two decades vs. those who graduated into more favorable times. Many Millennials, of course, hit the job market smack dab during the Great Recession. 

And on the investing front, consider a recent McKinsey & Co. report titled “Diminishing Returns: Why Investors May Need to Lower Their Expectations.” The name says it all, but the gist is that the consulting firm forecast 4.0% to 6.5% returns annually from the stock market across the coming years — down dramatically from the 7% to 10% annual gains common over the past 50 years or so. 

Millennials Looking to Improve the World, ‘Crave’ Community © TheStreet Millennials Looking to Improve the World, ‘Crave’ Community When you consider all this, then, those who fixate on Millennial spending habits are missing the point.

“The importance Millennials place on experiences is indicative of this generation’s desire to live life to its fullest, and I admire that,” said Adam Paoli, a financial strategist at The Heartland Group. “That said, I would caution the Millennials to position themselves to be able to continue enjoying life-enriching experiences, not only today but into retirement.”

And that, experts say, will require saving more and saving earlier than previous generations.

Retirement Planning for Millennials, In 5 Steps

Paoli points out that many in their 20s and 30s likely have seen first-hand a parent or other relative who has no choice but to pare back their lifestyle thanks to insufficient savings.

And given the unique pressures on both the lifetime earnings and long-term investment returns for Millennials, they should see these examples as a cautionary tale of what’s in store if they don’t prepare.

Here are five ways Millennials can be sure they have the experiences they want in retirement:

• Make a budget that includes savings. “It’s good to plan ahead and get your finances in order, and establish a goal for yourself,” said Katharine Perry, associate financial consultant at Fort Pitt Capital Group in Pittsburgh. This is important not just for retirement, but also everything else, from buying a home to affording that trip to New Zealand that you keep talking about.

• Save more than you want to. There are plenty of enticing ways to spend your paycheck, but given the constraints of low investment returns, your savings need to be higher than you think. Paoli recommends Millennials put aside 15% of their gross incomes. A recent study from personal finance site NerdWallet estimates the figure should be even higher, at 22%, in order to finance a comfortable retirement.

• Invest early. “Time is an incredible asset on invested money,” said Joe Duran, CEO and founder of United Capital. Consider that a 7% return on $50,000 for 10 years creates about $98,000 … while a 7% return for 20 years creates a nest egg of $193,000. It’s much easier to simply save early instead of coming up with that extra cash later on.

• Insure yourself when you’re young and healthy. If you wait to buy life insurance, long-term care insurance or disability insurance until you’re old and out of shape, you’re going to be paying more, said Matthew Grove, senior vice president of New York Life. “We believe the ‘experience’ Millennials should seek is the freedom that comes with being fully protected," Grove said. “When you take the risks off the table, life is easier.”  

• Ask for help. Millennials don’t trust Wall Street after the financial crisis, and many think they can find the answer to anything on the Internet. However, “Getting a correct answer from a professional could really save you time and money,” Perry said, while “you can shoot your financial success in the foot” with just one ill-advised decision. A good financial adviser ultimately pays their own way in the long run.

Jeff Reeves is executive editor of


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