The Unique Financial Planning Challenges Facing Millennials
From the troubling future of Social Security and Medicare to increased lifespans, 20- and 30-somethings are dealing with retirement savings issues that Baby Boomers and Gen Xers never had to.
Since Tim Healey is 31 years old, he can be considered an authority on the millennial generation and its particular characteristics. Older folks can read up on the current crop of people starting careers and building families, but Healey is actually living the life.
So when he discusses how to reach millennials, it makes sense to listen. For the past seven years, Healey has been a financial advisor for the GFM Advisory Group of Janney Montgomery Scott in West Chester. It’s been his goal to develop relationships that benefit both counselor and customer.
If one reads the generic profiles of millennials, Healey’s work sounds risky. The 20- and 30-something crowd can be capricious; something that looks great today may be undesirable in a week or a month or a year. And since much of the technology they employ is designed for planned obsolescence, it makes sense that their affiliations can be somewhat variable, too.
Healey gets this—but he also knows there’s a way to counter that fickle behavior. “You have to get a hold of millennials early,” he says. “They want things fast and with no paperwork. You don’t want to just talk about their account—you want to nurture them. They’ll move from product to product, but when they get a product or brand they want—like Apple—it becomes a way of life. And they stay with it.”
As baby boomers age out of the planning stages and into the preservation and harvesting of their savings, advisors like Healey have moved on to those who are just starting out on their professional journeys. Others are on their way, but they’re still faced with some big decisions. Healey and his team at Janney have developed a service called GFM Wealth Coach, which allows younger clients and prospects to ask questions and get information they might otherwise look for on the Internet.
Members of Generation X have been called slackers, latchkey kids and the MTV Generation—but they aren’t kids anymore. Those skewing toward the beginning of the 1965-84 demographic are squarely in their 50s, while those on the tail end are in their mid-to-late-30s.
The birth period ascribed to millennials isn’t quite as rigid. They’re generally looked at as having arrived from the early 1980s to the beginning of the 21st century and are defined by their tight relationship with technology, a heightened social consciousness, and their experiences with 9/11 and the Recession of 2007. Though some are established in their careers and deep into married and family life, a large number are relatively new to the ideas and challenges of preparing for their financial futures. They’re also quite content with experiencing life in the moment. “Millennials and Generation Xers don’t have a problem spending money on trips and vacations,” says Chuck Creighton, a financial advisor for the Media-based Evolution Financial Group. “They don’t get cheated on that stuff.”
They should be able to plan on plenty of leisure time as they get older, since the average life expectancy of U.S. citizens continues to be robust. It wasn’t so long ago that anyone who lived to be 80 was considered remarkable. Now, plenty of people can expect to make it into their 90s, so millennials and Gen Xers should plan for long and expensive lives. “When Social Security started, the mortality age was 62,” Creighton says. “Now, if you’re 25 years old and you retire between 55 and 60, you could live for another 45-50 years. Life insurance companies are writing coverages to 120 years of age.”
Though younger Americans may have different habits and preferences than their Baby Boomer predecessors, some basic tenets of financial planning prevail. Michael Lynch has a philosophy about assembling financial plans that hasn’t changed too much. “I try to make it all about the client or person I’m meeting with,” says Lynch, who works in the Exton office of uFinancial Group. “I like to figure out what’s important to that person—not what’s important to me or anybody else. You can correlate financial planning to building a house. What’s the foundation? Perhaps it’s an emergency fund. What are the short-term goals? What about retirement? College planning? Estate planning?”
The same questions that applied to the Boomers 30 years ago are still relevant today for their kids. “The goals haven’t changed,” Creighton says.
People still want to make sure that, once they stop working, they’ll be comfortable and won’t face any financial hardships. They want to finance a portion—or, in some cases, all—of their children’s college expenses. They want to buy houses, insure their lives against early catastrophes and prepare for what will almost certainly be high healthcare costs.
That last issue is perhaps the most important facing younger investors. “It’s becoming a bigger part of financial planning,” says Lynch.
There is great uncertainty about the cost and availability of healthcare 30, 40 and 50 years down the line. Thanks to fewer people paying to support the fastest growing segment of our society, there’s no guarantee Medicare will be around in even 10 years. Trying to imagine its survival several decades down the line is impossible.
And even though new therapies are attacking familiar diseases in encouraging ways, there’s no guarantee that other conditions won’t become more prevalent.Twenty-five years ago, few would’ve predicted the obesity epidemic and the attendant health ramifications—Type 2 diabetes, heart issues. And no one can predict what will be coming down the line. Will drug-resistant infections develop thanks to increased use of antibiotics? Tending to all of this will take money. Lots of money.
“People need to establish health savings accounts,” Creighton says. “If someone is healthy and contributing to an account in his 20s and not using that, it can build up over 40 or so years. “One of the things I’ve recommended to people is that, if they have enough disposable income, they should contribute the max to their health savings plan.”
Healey agrees that this is a wise move. He believes no one should pay for health-care costs after tax, so contributing pre-tax dollars is key. Another consideration Healey mentions to clients is choosing a higher deductible plan, in order to provide an impetus to stay healthy and adopt habits that will promote longevity.
Just about everybody wants to hang around for a long time. In order to plan for that, it’s not a bad idea to look into a long-term care account or policy that will pay off in the event of assisted-living expenses, home-care needs or full-on nursing-home requirements. That may not be something millennials should be necessarily considering, but Gen Xers should think about it. “You can buy a protection policy for long-term care or a hybrid in the form of an annuity,” Creighton says.
As younger investors prioritize their goals, there’s room for argument about healthcare spending, college prep and other considerations, but the one area that can’t be ignored is retirement planning. No financial advisor will allow anyone to begin a plan without looking ahead to the period that Creighton describes as “just being unemployed”—albeit by choice. With Americans inundated by advertisements romanticizing an end to the daily pursuit of purpose and paycheck, the idea of checking out of the working world early becomes more attractive.
f people are going to live well into their 80s and even 90s, they’ll need more money to live comfortably. Counting on Social Security is a bad idea. While it may still be around in 40 years, there will likely be restrictions on when people can access it, and it could even be taxed, thanks to ever fewer people paying into the fund. (The largest growing segment of the population today is people 65 and older.) Also, it’s possible that the government could push back the date people would be eligible to start receiving Social Security to preserve the fund’s assets.
According to Healey, millennials should be in a Roth IRA or 401(k) plan, because they deal with after-tax contributions and do not require any payments to the government once people begin receiving distributions. And though it is tempting to put it all into a fund with a target date close to planned retirement, Healey prefers his clients plan a little more carefully.
“We want to help clients allocate their dollars in the best way possible,” he says. “When they customize, they can distribute their money better. We want them to start saving money, for example, in a Roth IRA so that we can help them allocate it appropriately, based on their risk tolerance.”
Many advisors agree that the time to take more risks with retirement funds is when investors are younger. It’s a lot easier to ride out a sharp downturn in the markets at 35 than it is at 55. Becoming too conservative too early can prevent people from reaping the full benefits of their savings down the road. And it’s quite possible we’ll be working longer once we reach the middle of the century, in part to keep earning money but also to be more engaged and active as our health holds and longevity increases.
While single 25-year-olds don’t usually have much need to put money away for college, older people with nascent families should consider it. But saving for children’s education expenses should not come at the expense of longer-term goals. “Saving for retirement is absolutely foremost,” Lynch says. “You should never stop [doing that] to pay for college.”
Lynch recommends setting aside $50-$100 a month for college. There are plenty of options for those interested in saving for education, beginning with the 529 plans that now allow people to remove $10,000 for education expenses before college hits. Young parents should remember that financing every penny is not necessary. College graduates have a long time to pay off any loans they take.
There are different perspectives on insurance. Some believe that it can be used as a long-term investment that pays off when it matures. Others look at it as an income replacement that should be bought in terms that end when people’s earning power drops and mortgage responsibilities end. It’s an important component of a plan, but not the primary focus. As the advisors always say, it’s about the individual—no matter how young. Still, those working with millennials and Gen Xers should realize that they’re indeed facing some different circumstances.
“When Baby Boomers were in our 20s, we didn’t consider longevity,” Creighton says. “Back then, if we thought of someone in his 70s, we thought, ‘That’s old.’ We now have clients who are 100.”
With more to come.