The future is not necessarily bright for Generation Y. This group of young adults (also known as Millenials) has been challenged with financial obstacles most of their parents never faced. If you know one (maybe have one squatting in the upstairs bedroom) please share this article with them.
According to 2013 research from nerdwallet (yes, I’m citing research from folks who decided to call their company nerdwallet), today’s average college graduate is looking at a retirement age of 73. That’s more than a decade later than the current average retirement age.
Key reasons are an average student loan debt of $23,300 and a persistently weak job market, particularly for college grads. For those lucky enough to find full-time work, average inflation-adjusted wages are about $5,000 less than they were in 2000.
Those factors mean the average Millenial will be paying off student loans well into their 30’s, and will have very little saved for retirement at that point.
In a recent Forbes report on generational issues, every age group viewed retirement as their biggest vulnerability, but Millenials were the only age group to not make it their top priority. That makes them less likely to make contributions to retirement savings,
One last factor working against Gen Y: Financially, they are too conservative, given their long investment horizon. Why? The most common theory I have seen is that throughout their adult lives, they have seen extreme market volatility: the tech bubble burst, 9/11, the Great Recession.
So how can you help your favorite Gen Y-er get on track? Here are a few things they can focus on:
1) “Pay Yourself First.” This is one of the best lessons I learned in my early 20’s and it helped me start early. The first focus should be on building an emergency fund of 3 to 6 months’ salary. After that, it’s time to build up long-term savings. The easiest way to do that is usually through a deferred compensation plan. What’s that? Read on…
2) Deferred Compensation Many employers offer some type of savings plan where, through payroll deduction, pre-tax dollars can be contributed to a retirement account, such as a 401(k), 403(b) or Simple IRA. Furthermore, many employers will match up to a certain percentage of salary. While a paycheck reduction through deferred compensation may feel like a pay cut, the real pay cut occurs when you decline the match.
3) Roth IRA. After taking advantage of an employer’s plan, or if they offer no plan, the next good option for young investors is contributing to a Roth IRA. While Roth contributions have no immediate tax benefits, there are many advantages to a Roth. For one thing, there are many circumstances under which the money can be withdrawn early without penalty, including purchase of a first home and college expenses. Also, if Roth funds are not touched until after age 59 ½, all withdrawals are tax and penalty free.
4) Avoid Bad Debt. Learning the difference between good and bad debt is an important financial lesson. In general, good debt carries a low interest rate and represents dollars spent for a lasting asset. Borrowing money to get a degree that could increase your income potential? Good debt. Buying an affordable house? Good debt.
Bad debt has a high interest rate and/or doesn’t buy something that will help you in the long-run. Running up your credit card balances on clothes and trips? Bad debt. Buying a boat with a high payment you can’t afford? Bad debt.
5) Protect Yourself (And Your Loved Ones). Gen Y is getting to that age when we get new in-laws and, yikes, grandkids. Nobody likes to contemplate their own mortality, but if there are others who depend on your income then it’s time to have life insurance and disability insurance. Definitely when kids come along, it’s time to meet with an agent. Check out any benefits available through your work first but that probably won’t be anywhere near enough coverage. Beyond that, an affordable term policy should be enough for most people. Permanent forms of life insurance such as Universal Life, Variable Life or Whole Life are probably not a good idea but the agent will almost definitely pitch one of those because the commissions are significantly higher. Beware.
6) Check Your Credit Score. At least once a year, everyone, not just Millenials, should check what’s on their credit report. It’s free and the best way to keep on top of any reporting errors that might come back to haunt you later, like when applying for a mortgage. annualcreditreport.com and freecreditreport.com are two websites you can check out.