The saving game
For many of today’s young professionals, saving toward financial freedom is a matter of trust.
From the pages of In Business magazine.
Depending upon which article you may read — and there are a lot of them — young professionals from the Gen X and the younger Gen Y (millennial) generations are either saving more than ever in 401(k)s, or saving with a preference for things other than retirement.
In fact, both are true.
A recent study from Bank of America Merrill Lynch found many young professionals are getting auto-enrolled into their employer’s 401(k) plan when they’re first hired. Of the auto-enrollees, eight in 10 will continue in the company’s program and it’s highly unlikely they’ll opt out.
Then there’s a recent survey from Earnest, Amino and Ipsos, conducted in July 2017, that found 69% of millennials are not saving for retirement.
But they may be spending their money on other things.
Trip Advisor, for example, reports that millennials are spending $2,915 a year on average for travel, a figure that’s expected to grow with age. That coincides with a May 2017 Merrill Edge report that found the majority of millennials choosing to spend their money on travel (81%), dining (65%), and fitness (55%) rather than on their financial future.
Many millennials are moving back home, according to Fidelity Investments’ second biennial Millennial Money Study in 2016, and 69% percent believe it is more acceptable to do so (64% for Gen Xers). Between 2014 and 2016, Fidelity noted a 7% increase in the number of millennials moving back home, from 14% to 21%, according to its survey. That might be the reason they’re saving earlier and have more money already set aside in their emergency funds ($9,100 on average) compared to Gen Xers ($8,700) and baby boomers ($7,100).
We wanted to better understand the saving habits of area up and comers, find out what professionals are seeing, and learn what advice they are doling out.
Overall, young professionals in the Gen X and Gen Y populations are driven to succeed on their terms but they’re also very, very wary.
Just as their grandparents or parents may have been affected by the Great Depression, the Great Recession has left an indelible mark on younger professionals.
Perhaps their parents struggled during that time, or they witnessed banks and businesses closing, a collapsing stock market, or Bernie Madoff-types rocking their faith in the financial industry. More recently, data hacking and security breaches of astronomical proportions have likely shaken their sense of security.
Is it any wonder why the younger generations have financial trust issues?
For some area investment professionals, restoring faith in the financial industry is a constant battle. Dan Weiss, financial advisor and co-founder of LBW Wealth Management in Madison, frequently hears stories about young investors being pressured into products. “To be honest, that’s our largest competitor,” Weiss admits, “the fact that someone before us put them in an uncomfortable financial position or took advantage of them.”
Nate Byers, CPA and financial planner at Johnson Block & Co., agrees. He’s seen many young professionals freezing when they should be investing. “I think a lot of that has to do with a lack of trust in the stock market since 2008,” Byers says, “and in financial advisors in general.”
Both Weiss and Byers are millennials.
Many tech-savvy young professionals are opting to conduct their own financial research these days, and that’s a significant difference between them and the older baby boomers that might be more willing to trust the advice of personal financial advisors.
Doing their own legwork can keep the younger set more engaged in their own financial decisions, Weiss observes.
“I think that’s a good thing, but unfortunately, I don’t think they’re saving enough. I don’t think anybody is, frankly, but they are making better attempts.”
Cutting the paycheck pie
Perhaps saving isn’t as enticing as it once was, Weiss opines. “Years ago it was easier and probably more attractive for people to save because they were earning more on their money.”
Back then, homebuyers often waited until they had saved up 20% for a down payment on a home, whereas today some people can still get into homes with very little or nothing down. “While those practices get people into real estate, I don’t know that they encourage saving,” Weiss states.
Other factors are chipping away at their ability to save. Easy credit is one. “Instead of saving, people more often whip out a credit card,” Weiss says. “That wasn’t the case decades ago.”
Meanwhile, health care costs continue to skyrocket. Gone are the days when employers might have covered 80% or 90% of their employee’s health insurance premiums. Whether getting insurance through their employer or the national exchange, health insurance is likely biting off a significant chunk of a worker’s paycheck.
Stock market gains experienced over the past 80 years are likely a thing of the past, too, suggests Weiss. “We don’t believe that those kinds of returns will be as easy to attain over the next 80 years. The concern is that if you’re not able to achieve on average the same as you did 30 years ago, you have to put more money away to achieve similar results.”
Finally, there’s the student loan debt. Years ago, students or parents were able to save up and pay their way through college without the need for massive student loan financing. “Now, when kids come out of school, the debt they’ve accumulated may keep them out of other investment options, like real estate,” Weiss adds.
Laura Skilton Verhoff, a partner and attorney at Stafford Rosenbaum and an adjunct professor at the UW–Madison Law School, agrees that students are starting off in a difficult position. “School loans have caused some people to struggle with the idea of saving.
“How do you save when you owe thousands a month in monthly debt?”
According to Wells Fargo Investment Institute’s generational research report, nearly 34% of millennials have a median balance of about $20,000 in student loan debt, which most describe as “unmanageable.”
That doesn’t mean young professionals aren’t enjoying themselves. In fact, this is a generation that tends to put a premium on experiencing life to the fullest.
“Millennials are definitely the YOLO (You Only Live Once) generation and want to enjoy life now,” states Byers. “Between their words and their actions, I see YOLO taking a priority. They also believe they are good savers, but I don’t see that in practice.”
Sarah Brenden, vice president of private banking for Park Bank, concurs. “They may be spending more of their available cash on desired lifestyle goals like travel, dining, and fitness.”
Brenden, also a millennial, works primarily with high wealth individuals now, but she previously served as a branch manager. From a banker’s standpoint, she wishes younger customers came to the table with a better understanding of financial literacy including a general knowledge of banking terms, savings, and retirement goals.
Park Bank and other financial institutions have partnered with area high schools to help students understand key concepts, “but if it was a requirement in schools, that could help a lot,” she suggests.
So what’s a “YP” to do?
Byers says a standard rule of thumb for young professionals with about 30 years ahead of them should be socking 20% of their gross income away every month toward retirement. “That’s the magic number,” he notes, “but even that’s not a guarantee because it doesn’t reflect personal circumstances.”
Weiss emphasizes the importance of building up an emergency fund before anything else. Ideally, that fund should be able to cover three to six months of non-discretionary expenses, or those things that must be paid. “The biggest emergency we typically see, especially for a young individual, is a loss of employment, and if that person is in a variable position, such as a commissioned sales person, they will need even more cash on hand.”
There are alternatives to putting money into a standard savings account or money market, Weiss explains. One interesting option is searching the internet for high-yield savings accounts or money markets that offer a higher return but are still FDIC protected.
“As long as you’re careful and diligent about reading the fine print, many of these accounts do not have minimum balances or associated fees. We often recommend people search Bankrate.com, but we always suggest using a financial professional, as well.”
Large national banks like Ally, Citibank, or Goldman Sachs offer online savings or money market accounts that may pay 1% or 1.5% interest compared to .01% they may be earning at a local financial institution. A quick check found Barclays offering 1.30% APY on all balances, but in general, bank offers change frequently.
“It’s important to choose a financial institution you’re familiar with,” Weiss advises, cautioning that an online customer should not expect the same level of service they would receive from a local institution. Fees can be higher, as well.
“But if you just want to earn more interest on a sum of money that you don’t need a lot of access to, you might as well get paid on it,” he says. “It’s still FDIC-covered and by regulation you can still access that account on a limited basis. You’re not assuming any market risk, you’re just getting more return — in relative terms, 10-times what you might earn at a local bank — and you’re not locking it up like a CD.”
Byers has noted reluctant professionals being wary of the two most common types of savings models: the traditional, commission-based product, like a mutual fund or insurance, or the assets under management model, where an advisor is paid a percentage of a larger sum of money. The latter is typically out of the question, he notes, because when they’re first starting out they often don’t have large sums of money available to invest.
Wary clients tend to fall into two categories, Byers observes. Either they don’t want to think about investing for retirement yet, or they can’t warm up to the idea of a financial professional getting paid commission to handle their money. These concerns often make them hesitant to move one way or another.
But there’s another option, as well, notes Byers. He is a member of the XY Planning Network, a national organization of fee-only financial advisors specifically focused on young Gen X and Gen Y investors. The XY Planning Network is a subscription-based option offering links to online and local advisors, and its fee-for-service structure helps alleviate fears some young professionals may have about conflicts of interest.
Unfortunately for Byers, the online site only lists advisors holding a CFP [certified financial planner] credential. In an industry known for its acronyms, Byers is a CPA/PFS — certified public accountant and personal financial specialist. The numerous credentials in the financial industry can make a complicated subject even more confusing, he admits.
“Sometimes it’s difficult for me to get to my value proposition because of all the questions people may have about all the different credentials.”
In general, Byers has observed many young professionals seeking a quick way to financial freedom rather than to retirement. Beyond socking money away in a 401(k), he believes the best and quickest way to reach those lofty goals are through entrepreneurship or rental real estate. “Industry-speak may shun it, but for certain people it’s important to consider.”
To the Gen X and Gen Y populations, technology is as natural as riding a bike. More and more they’re teaching themselves and saving through the use of savings apps and robo (yes, robotic) advisors, which are quickly growing in popularity.
NerdWallet describes a robo advisor as an online, automated portfolio management service that uses computer algorithms to select appropriate investments based on an investor’s risk tolerance and time horizon. Among NerdWallet’s two favorites: Wealthfront and Betterment.
Robo advisors may cost less than working with a human financial advisor, but there are downsides, too.
A robo advisor would never tell an investor to start a business, buy real estate, or make smart tax decisions, nor can it make emotional decisions, which can be good or bad, notes Byers. “In 2008, emotional decisions cost a lot of people significant amounts of money,” he reminds.
But robo advisors can manage an IRA, for example. A client would simply plug in their goals and the robot would proceed to buy and sell investments.
Byers has a personal robo-advisor account. “I know how to do it myself, but if something happened to me, my wife is already set up and she wouldn’t have to worry about anything, at least in the short term.”
The latest trend in the robo-advisor world, he says, is reintroducing humans into the interactions between the robot and the investor. “A lot of advisors are using robo advisors because of the efficiencies they provide,” Byers says, “but there’s still a human element that’s needed.”
For wary investors uncomfortable with managing their own investments, a robo advisor might remove some of that burden from their shoulders, Byers suggests. “They may want to hire somebody but don’t trust the humans. They trust robots more.”
Advising Gens X & Y
Dan Weiss, LBW
- The biggest asset they have is time, and they should utilize it. They may be working for another 30-plus years and that’s a lot of time to develop healthy habits so they are better positioned to take advantage of opportunities in front of them.
- Build an emergency fund and hold it in cash. Before looking to save for a house, college, retirement, or other specific goal, they need adequate cash on hand to fund emergencies. It’s not about earnings; it’s about peace of mind.
- Look outside of the area for savings vehicles with higher earning potential. National banks typically offer high-yield savings accounts and money markets but are still FDIC protected.
- Higher-end income earners need to really understand their employer’s sponsored 401(k) or 403(b) programs, the options, and what the company match is so they can utilize that to the best of their ability.
- Interview several financial advisors to find one they can trust, feel comfortable with, one that is competent, demonstrates a good work ethic, provides a holistic approach to their finances, and is transparent and reasonable in costs. I’d also recommend a fiduciary, someone who is licensed to put the client’s needs first. Finally, find someone who is really educated and not just a salesperson.
- If you’re feeling pressured by anyone to sign anything, especially on the first meeting, don’t do it!
Nate Byers, Johnson Block & Co. Inc.
- The stock market is not the only way to invest. It’s louder and has a lot more advertising so everyone focuses on it, but there are two other paths: rental real estate and business entrepreneurship. For some, it is a legitimate option.
- Look beyond conventional wisdom because there may be alternate plans available to you that could get you to financial freedom much sooner.
Sarah Brenden, Park Bank
- Start saving as early in life as possible, and of course save for retirement, but there has to be a balance, too. That willingness by millennials to spend their money on lifestyle goals is something other generations can learn from, too. You have to be able to enjoy the pleasures life has to offer.
Laura Skilton Verhoff, Stafford Rosenbaum
- Get term life insurance even if you have insurance at work. If you can lock in at a low rate now, do it because it likely won’t cost much money.
- If the saving is difficult, life insurance can help close that gap until the saving becomes easier.
- And if you’re young and have children, get a couple of policies. Even Gerber offers kids’ policies.
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