Some of us can only look with envy on those in their 20’s and dream of what 40 years of future appreciation could do for a dollar saved today – if only they would stop texting long enough do so. We may echo G.B. Shaw in lamenting that youth is wasted on the young. However, there’s evidence that what has been called the “entitlement generation” actually have an admirably conservative outlook: only 24% have more debt than savings, compared to 31% of Boomers. And a TD Ameritrade study found that 25% of Millennials “double down” on retirement savings with both an employer-sponsored plan and an IRA, compared to 16% of Boomers and just 9% of older investors.
It’s hard to know if this represents generational frugality or just a relative lack of truly major expenses such as houses and children. But it certainly doesn’t fit the instant-gratification stereotype.
Reactions to Risk
On the other hand, younger people are also quite conservative in the way they invest. According to a spokesman for B of A Merrill Lynch, Millennial retirement plan participants tend to be heavily allocated in cash. An alarming 60% cash out their 401(k) when they change jobs. This group’s distant retirement horizon should let them afford plenty of investment risk. But spooked by recession, a weak job market and other concerns, they “don’t feel that they have the capacity to take risks…so their asset allocation doesn’t align with age.”
It’s an ironic and unfortunate situation. But the good news is that unlike the Boomers-about-to-retire narrative that often preoccupies the financial industry, there’s lots of time to do something about it. So how should the financial industry reach out to Millennials?
Lattes and Beer
One approach is to highlight the long-term impact of seemingly small decisions. Popularized by David Bach as “the latte factor,” the idea is that by giving up a daily four-dollar coffee drink – or any other small discretionary expense – and investing the money instead, you can build up a fairly astounding amount of money over several decades. There’s even an iPhone app to illustrate the concept. To take another beverage-focused example, putting a dollar a day into a Roth IRA for 40 years can eventually fund an “awesome tower of retirement beer” more than a mile high.
It’s unclear how effective this line of thinking actually is. Some may even find it more condescending than clever. If we step away from such a demographic mindset, whether towers of beer or the classic rocking-chair imagery, the point we’re actually trying to make is that we all control our own financial destinies much more than we may appreciate.
The Future is Unwritten
The very real possibility of financial independence is a positive message that’s compelling in uncertain times. It may be particularly resonant for those who are young, fundamentally optimistic, and still defining their place in the world. As the Merrill representative put it, “they don’t have a diminishing view of themselves… They don’t think of how they’ll retire, but of how they’ll reinvent themselves.”
Reaching these people may require that we reinvent the way we communicate with them. The tools we use matter, and could be far more social, more immediate, and less familiar than what we’re comfortable with. The Millennial retirement message may sound like a cross between a typical appeal to “visualize your retirement” and a college commencement speech. And perhaps more so than either one, it really is true: your future is your own, and you can make of it what you choose.