The Good and Bad of Millennial Financial Habits
Millennial Americans – people born between 1982 and 1999 – now represent a larger portion of the U.S. population than Baby Boomers (those born from 1946 to 1964). New research from the Transamerica Center for Retirement Studies demonstrates that Millennials are saving their money at a higher rate than their Baby Boomer counterparts.
Nearly 75% of Millennials are saving for retirement at an earlier age than any previous generation. Half of their generation is putting away 6% of their income or more – a statistic that makes Millennials the best cohort of savers since the Great Depression – despite carrying unprecedented levels of student loan debt. Those who participate in their workplace retirement plans are saving even more (7% per year on average).
That being said, Millennials are not doing an equally good job of investing. The research suggests that many younger Americans are skeptical of or confused by the topic of investing, and tend to keep their savings in cash. That is problematic, since low interest rates essentially drop their return on investment to 0 percent.
In the Transamerica survey, 25% of Millennial respondents said they weren’t sure how their retirement savings were invested. When they were prompted to check, they were more likely to report higher allocations to bonds, money market funds and other low-return investments than their Baby Boomer or Generation X counterparts.
There are a variety of prescriptions for the problem of being under-invested, which is much more easily corrected than bad savings habits. Millennials need to be educated about investing – a subject that is rarely taught in high school or college. The key to guiding Millennials towards financial independence is helping them to become more comfortable with risk.
While everyone knows that the markets will go down from time to time, young people will be more likely to invest if they understand that the markets have always recovered and beaten their previous highs.