Make Your Money Work for You: Investment Tips for Millennials

April 18, 2013

 Working in the retirement industry has made me privy to the challenges that Baby Boomers face as they near the day of hanging up the business suit for a golf polo.  It is well documented that the economic downturn has impacted my parents’ generation, but what are the repercussions for a 28 year old and the rest of the millennial generation that will not be retiring until the 2050’s?

Being a recently minted retirement nerd has certainly opened my eyes to the need to save for my future, but I fear that many my age are more concerned with the new features of the latest iPhone than the status of their 401(K) plan.  Not only has the economic downturn forced Baby Boomers to work longer, but it has prolonged millennial’ s transition into adulthood. Now young people find it difficult to start stable careers, relying more on their parents or roommates to help share in expenses.

In generations past, it seems as if there was a smooth transition from school to buying a house and starting a family.  Young folks these days are starting that transition later on in life, and tend to harbor the belief that they will be young forever -- slowing the need to save for retirement.  While at the same time, young people have an influx of social media in which people post pictures of doing fun things, or buying glamorous toys.

In order to keep up appearances, young people are spending, rather than saving.  And why would we save?

  • The thought that we are only young once and we should live it up while we can, prevents us from saving.  Much like the old Rod Stewart song suggests, we are “Forever Young.”
  • We saw our parents lose their savings which resulted in a distrust of financial institutions, leading us to believe only we can be trusted with investing decisions. BUT…
  • The ineffectiveness or lack of education about financial matters is also prevalent for younger generations.
  • Many feel that they do not have the means to save for retirement, because they are paying off huge student loans, and/or credit card debt from trying to keep up with the Joneses.

In reality, younger generations need to start saving for retirement because time is our greatest asset.  The old saying that “time is money” can be illustrated in the compounding of interest.

Putting smaller amounts of money away in your 20’s and generating an average return of 6% results in more savings than the person who started saving a larger amount in their 50’s and averaged the same 6% return on investment.  Millennial’s lack of education about investing, however, is certainly a barrier that keeps them from adhering to the sage advice to start saving early.  Many wonder, where do I even begin to start investing?

  • A good start is to analyze your risk tolerance, which can easily be done with a risk tolerance calculator.  No matter what your risk tolerance is, be aware that the higher the reward of an investment, the higher the risk of loss.
  •  After determining your risk tolerance, it is a good idea to think about creating a diverse portfolio.  A portfolio filled with a single stock or stocks from one sector of the economy are going to create more risk than a portfolio consisting of a variety of investment vehicles, such as stocks, bonds, real estate, commodities, and cash.
    • That is because a diverse portfolio would have investments that have different correlations.
    •  Mutual funds are an option when you want to invest, but do not really have the time or energy to research individual stocks or bonds.
    • One thing that is easy to forget when investing is your investment cost.  It is easy to forget because sometimes investment firms do not make it easy to decipher what your cost is to invest.  Lower fees mean more money in your account, and more money in which the compounding effect will increase your savings.
      • If you are trading in a Self- Directed Brokerage, you may be paying a flat fee for each trade that you make.
      • If you are investing in mutual funds within your employers 401(k) plan, you may see an investment fee stated as a percent (.50%).  These “basis point” fees that you pay depend upon your account balance. A .50% fee on a $1,000 account would mean a fee of $5 to invest in that particular investment
      • Don’t forget to determine how much you need to save for retirement.  There are a number of calculators on the web that will give you an estimate and help you determine how much you need to save.

The choice of retirement is yours, do you want to work longer, or do you want your money to work for you longer?

This post was written by Chris Kamp from Colorado PERA.

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