Believe it or not, the oldest millennials will be turning 36 this year. However, as they launch into adulthood, many of them are struggling to achieve traditional life milestones, such as getting married, having kids or buying a home. In fact, a 2016 study by the Million Dollar Round Table found that 53 percent of millennials are worried they will never achieve these types of milestones.
Millennials have different financial priorities and goals, especially when it comes to retirement. Because of this, financial advisors have a unique opportunity to engage with those who are focused on building future wealth.
What’s Holding Millennials Back
Millennials face different economic challenges than older generations ever did. Student loan debt is one of the biggest challenges, with millennials owing nearly $1.3 trillion. On average, members of the class of 2016 have an average of $37,172 in student loan debt, which is up 6 percent from those of the class of 2015. The significant and growing college debt crisis is causing many millennials to delay saving for retirement, which directly jeopardizes their future standard of living.
While education is vital to getting ahead in today’s society, uncontrollably rising student loan costs will set many millennials back. For instance, it is estimated that graduates of four-year colleges who took out student loans will spend more than a decade saving up for a 20 percent down payment on a median-priced home. That’s nearly double the 5.3 years it is expected to take graduates who didn’t have to take out loans to fund their education. With rising housing costs, many millennials may have to purchase homes at increasingly high debt-to-income ratios, heightening the risk of mortgage default.
Another challenge millennials face is lagging earnings due to the 2008-2009 recession and the subsequent slow recovery. With a median household income of $40,581, millennials earn 20 percent less than baby boomers did at the same stage of life, despite being better educated, according to Federal Reserve data.
What millennials earn early in their career can greatly influence the arc of their earnings later on.
How We Can Help Them
Because they have not received the exposure to the stock market that has helped previous generations accumulate wealth, millennials are less confident about investing. Moreover, many are choosing to delay saving until all their debt is paid off, despite the risk and opportunity cost associated with waiting to save. As advisors, we need to help our millennial clients find a balance between paying down debt and finding ways to maximize savings.
Some millennials have a greater inclination than previous generations toward saving, so they live at home longer to establish a solid financial foundation before living on their own. In addition, millennials are staying on their parents’ health insurance plan until they turn 26, to increase their amount of disposable income.
If your clients are no longer eligible to be on their parents’ plan, they should seek health care coverage on their own. While many may not see the need for it at a young age, experiencing a sudden illness or accident without the proper protection can drastically impact their financial stability. Proper disability insurance coverage also should be in force because for young workers such as millennials, their ability to earn a paycheck is usually their biggest current asset.
Millennials also should take advantage of their workplace benefits, such as 401(k) plans, to ensure their readiness for retirement. Even if they are not able to contribute a lot, making small contributions each month will give them time and the power of compounding interest. If they don’t have a 401(k) plan at work, there are many individual retirement account options available.
Along with focusing on saving for retirement, it’s equally important for millennials to build a strong foundation of cash savings. Having enough to cover at least three to six months’ worth of necessary expenses is a good rule of thumb for millennials to follow so they can keep their retirement money invested. This could be in savings accounts, cash value of life insurance or other readily accessible sources of money.
Millennial clients may have little money to invest and even less in assets, but they can be a perfect fit for developing a long-term working relationship. Stop overlooking a generation that has the potential to be your future high-net-worth clients.
Matthew T. Hoesly, CFP, ChFC, MSFS, is a financial advisor with Resource 1, a registered investment advisory firm in Norfolk, Va. He is a nine-year member of the Million Dollar Round Table with four Court of the Table and one Top of the Table honors. He may be contacted at [email protected]