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Millennials Have More Appetite for Stocks Than Reports Suggest

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Are millennials afraid of the stock market? This cohort came of age at the height of the Great Recession, and some recent media reports suggest that this has made young adults more reluctant to put their money into the markets.

A new analysis from MagnifyMoney, however, shows that millennials aren’t exactly allergic to “risky” investments such as stocks. We examined 20 years of workplace savings account data from the Federal Reserve’s Survey of Consumer Finances and compared millennials’ investing habits with prior generations of young savers.

Key findings

  • In 2016, millennials had 60.3% of retirement accounts like IRAs and workplace savings accounts like 401(k) plans allocated to stocks or stock funds. This means millennials have 8 percentage points more of their retirement account funds invested in stocks than those 53 and older — the widest gap since 2001.
  • In general, exposure to stocks (equities) has trended downward over the past 20 years. In 1998, all generations had an average of at least 60% of their workplace retirement savings in stocks and stock funds. In 2016, millennials were the only age group who allocated more than 60% of retirement assets to stocks and stock funds.
  • How investors view their tendencies and what they actually do can be two different things. Some millennials claiming they are risk-averse (and thus claim they don’t invest in stocks) may unknowingly own stocks through target date funds (TDFs) and other multi-asset class investments in their retirement plan.

Millennials’ stock-heavy portfolios in line with conventional advice to young investors

Overall, millennials have more of their retirement funds invested in stocks and stock funds than older savers. Here’s a look at the allocation of retirement account assets across millennials (ages 35 and younger), Generation Xers (ages 35 to 51) and baby boomers (ages 51 and over).

In 2016, millennials had, on average, 60.3% of their retirement savings in stocks and stock funds, compared with just 53% for Generation Xers and 52.3% for baby boomers.

This trend of millennials allocating a larger portion of savings to higher-risk or more volatile assets such as stocks is actually in line with conventional retirement planning advice. Younger workers are advised to be more aggressive investors — with decades left to save and weather market ups and downs, they can afford to front-load risk (and reward) today.

Older generations, on the other hand, are advised to allocate retirement funds to less volatile assets as they get closer to retirement age. Baby boomers, in particular, might be planning to live off of retirement savings soon — or might already be relying on those savings. So it’s important to shield retirement savings from high-risk and volatile investments.

Across age groups, today’s investors are choosing stocks less

Overall, this analysis shows that today’s investors are less likely to have a large portion of retirement savings allocated to stocks and stock funds. Here’s a chart that compares the percentage of retirement savings allocated to stocks among age groups, over time:

Stock allocations across all three age cohorts show a largely downward trend, with current stock investments among the lowest levels reported.

Two major changes since 1998 may explain these shifts better than differences in generational risk aversion: the decline of workers with pensions and the rise of target date funds.

TDFs are playing a role in “right-sizing” asset allocations based on age, including those of millennials, who have had access to them since the beginning of their saving careers.

Meanwhile, most private-sector workers today only have defined contribution plans (401(k)s), and not defined benefit (DB) plans.

Major market ups and downs also correlate to some of the trends in this graph above, too. Stock allocations rose in the late 1990s, for example, as the dot-com bubble boomed — and fell in 2000 following its burst. Another small dip in stock investing is seen from 2007 to 2010, in line with the Great Recession and following recovery.

How to start investing in stocks

Whatever your age, buying stocks can be a smart way to grow your net worth and build a secure financial future. However, weathering stock market volatility isn’t always easy — and you’ll want to make sure your stocks strategy is in line with the rest of your financial goals.

If you’re interested in adding stocks to your investing or retirement savings strategies, here’s where you can begin.

Learn the stock market lingo. The world of stocks can seem complicated at first, so picking up on common stock terms can help you make sense of options. You should figure out what stock funds and exchange-traded funds are, for example, and know the difference between preferred and common stocks.

Set your stock investing goals. It’s important to make sure you align your stock investments with your bigger goals. Maximizing your 401(k) funds for a retirement that’s 30 years away will call for a much different investing strategy than if you’re investing in short-term savings. If you know what you want to accomplish by investing, you can choose stocks and funds that are most likely to make that happen.

Research stocks and funds. Once you’re aware of the types of stocks, funds and other assets you can buy, you can look for specific shares that you think are a smart buy. You can research how stock prices are set, and how you can evaluate whether a stock is overpriced or undervalued. Keep an eye out for deals you think are good, and figure out which ones would match well to your investing goals.

Review your account allocations. Many investors have a 401(k) or IRA but might not know how their funds are invested within those savings accounts. Revisit your retirement accounts to see if you want to adjust your allocations for new contributions. You might even want to rebalance your portfolio, selling some assets and buying others, to align with your targeted returns (and risk).

Set up a brokerage account. Most investors can’t buy and sell stocks directly — they’ll need a brokerage account to do so. A traditional broker can be an affordable way to get started — just look for one with low fees to ensure that your returns aren’t eaten up by investing costs.

Download an investing app. Downloading an investing app can be a smart and simple way to get started. Some of the best investing apps can help you analyze stocks, trade and manage investments and even find more funds to invest. Robinhood, for example, charges no commission fees on trades. Or try Acorns, where you can link your checking account to round purchases up and invest the change.

Stay cautious when getting started with stocks. No matter how well-researched or experienced an investor you are, no one can predict the future. As a new investor, however, it’s easy to make rookie mistakes that can cost you big. Keep in mind that every investment you make carries a risk of loss, so start investing a little bit to get comfortable while figuring out the right investing strategy for you.

These tips can get you started if you want to invest in stocks, but make sure you aren’t overlooking other ways to invest.

In some cases, stocks won’t be the best way to invest your funds and keep them growing. If you’re stocking away money for a shorter-term goal, you might want to consider a certificate of deposit. And a savings account is an old favorite if you want to safely store emergency funds or keep your funds easily accessible.

Adding stocks to your investing and money management strategy can be a move that pays off big. The U.S. stock market has consistently performed well, and lots of people have grown their wealth and net worth by investing their funds here. Start small and simple, investing what you can afford to each month, and you could see the effects add up over time.

Methodology

MagnifyMoney examined 20 years (1998 to 2016, inclusive) of workplace savings account data from the Federal Reserve’s Survey of Consumer Finances (SCF) to determine if millennials (young adults ages 35 and under in 2016) are more risk-averse than prior younger savers.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Elyssa Kirkham
Elyssa Kirkham |

Elyssa Kirkham is a writer at MagnifyMoney. You can email Elyssa here

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Retirement

Financial Independence, Retire Early: Should You Consider FIRE Retirement?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Nobody wants to spend their golden years working under McDonald’s golden arches. However, some savers aren’t content to wait for their golden years to put their feet up and stop working.

In recent years, a cohort of millennials and younger savers have adopted an approach to retirement savings called FIRE, an acronym that stands for financial independence, retire early. The FIRE retirement movement challenges its followers to view every financial decision they make through the lens of the question “does this bring me closer to or further from retirement?”

“One of the things that motivated me to become financially independent was watching one of my coworkers collapse and almost die at his desk,” said Kristy Shen, a FIRE blogger at the website Millenium Revolution. “I now realize that your health is not worth trading for money.”

By advocating a laser focus on retirement goals and building a nest egg early, FIRE asserts that workers can reclaim decades otherwise lost to status meetings and sad desk lunches by retiring for sooner than their 60s.

What is FIRE retirement and how does it let you retire in your 30s?

The goal of FIRE retirement is to make you financially independent — no paycheck, no boss — with sufficient assets saved to retire decades earlier than most Americans. While many of the FIRE movement’s practitioners talk about their lifestyle with the zeal of converts, there’s no official list of rules or tips you have to follow.

Read through the FIRE Reddit page or one of the many blogs detailing methods people have adopted to achieve FIRE and you’ll see that it’s easy to get lost in the minutiae of advice and warnings. But at the end of the day, FIRE retirement boils down to having the initiative to plan out how much money you need to retire at a target age of your choosing, and the discipline to build a nest egg by cutting costs and boosting income.

How much money do you need to retire early with FIRE?

Calculating how much money you need to save before you can leave the office forever can be difficult with a traditional retirement. It’s even tougher to plan for a FIRE retirement, given that retiring in your 30s would mean anticipating around 50 or more years of expenses. Add to that the fact that you can’t start collecting Social Security until 62, or withdraw money from an IRA account without a penalty before age 59 ½, and you begin to understand the daunting challenge facing anyone hoping to retire before middle age.

However, the basic questions you need to ask yourself for FIRE retirement and traditional retirement remain the same. Determine how much annual income you require to maintain your anticipated lifestyle in retirement by figuring out how much you’ll spend on everything from groceries to medical costs.

If you were aiming for a traditional retirement in your 60s, you would add up your estimated annual expenses and multiply this figure by 25, which would give you a good goal for the amount you need saved in a portfolio of stocks and bonds.

Why 25? In 1999, three economics professors from Trinity University in San Antonio conducted a study of the stock market and determined retirees should have a portfolio that large to allow them to withdrawal 4% the first year of retirement, and increase this amount each year to match inflation. Based on the historical returns offered by markets, retirees could live comfortably for at least 30 years with this strategy.

But if you retire at age 30, you won’t want to start looking for a job as a 60-year-old because your portfolio ran out of funds. FIRE practitioners set a goal of amassing far more than the 25 times their annual retirement expenses to help increase the odds they’ll remain financially independent for the long haul. “The 4% rule is still a valid foundation, but that doesn’t mean we’re just going to blindly follow it regardless of what happens,” said Steve Adcock, a FIRE blogger who runs the website ThinkSaveRetire.

Ultimately, the particulars of each person’s FIRE retirement plan will reflect both their means and saving priorities.

“Not everyone is going to be able to retire at 35,” said Adcock “But I do believe that early retirement is more achievable by more people than they [might] realize. The average retirement age is something like 62 or 65, so if you retire at 58, guess what? That’s early retirement.”

A few FIRE scenarios

To give an example showing how demanding attaining FIRE retirement can be, a person who estimates their annual retirement expense at $45,000 and who wants to save 30 times that amount would need to accumulate $1.35 million. Assuming this person started earning an income at age 21 (to be generous), they’d need to save approximately $71,000 every year to reach her target by age 40.

There are different methods used among FIRE practitioners. Some members of the FIRE community, such as blogger Mr. Money Mustache, stick to what’s known as “lean FIRE,” where annual expenses are kept below $40,000 a year. Others, such as the writer behind the blog Physician on Fire, practice “fat FIRE,” where frequent travel, meals out and other expenses total around $80,000 or more a year.

Type of retirementHow much you’ll spend a yearHow much you need saved
Lean FIRELess than $40,000$1 million or less
Fat FIRE$80,000 or moreAt least $2 million
Traditional$50,000*$1.25 million

*Number based on the latest data from the U.S. Bureau Statistics showing the average annual expense of households headed by those 65 years and older

A recent Harris Poll survey of FIRE advocates conducted at the behest of TD Ameritrade found 33% of respondents were targeting savings between $1 million to $2 million, reaching a middle ground between the amounts listed for the lean and fat versions of FIRE retirement. On the extremes, more people (37%) aimed for more than $2 million than those (31%) with more modest goals of below $1 million.

How is it possible to save so much money so quickly?

Given the ambitious goals of FIRE practitioners, unless you’re already pulling down a big paycheck, saving 15% of your income each year isn’t going to cut it. According to the FIRE blog FinancialSamurai, the ideal savings target is 50% of your annual income, although with the concession that anything more than 20% is acceptable.

Given that the median household income in America is $61,372, according to the latest government data, one may be able to understand why FIRE retirement has been criticized as an option only available to people who are already quite privileged.

But regardless of what income FIRE retirement hopefuls start with, saving the money they’d need to drop out of the workforce in their 30s or 40s means living well below their means. The ways in which they accomplish this may sound familiar to anyone who’s read a personal finance article about cutting costs.

These include:

  • Minimizing housing needs and expectations — housing is most people’s single largest expense, so securing a lower mortgage or rent can provide dramatic savings.
  • Biking instead of driving (when feasible) to save on fuel costs
  • Avoiding unnecessary fees of all kinds, such as monthly maintenance fees on checking accounts
  • Limiting or eliminating all spending on meals out
  • Unsubscribing from gym memberships, online services or other recurring entertainment costs you won’t absolutely need

Let’s take a closer look at housing, which accounts for more than 30% of all annual expenses for most Americans. People aggressively pursuing FIRE retirement will seek out low-cost housing in high cost-of-living areas. By sacrificing comfort, they reap the benefits of the higher salaries available in such areas. Once they’ve saved enough money to pull the trigger on early retirement, they move somewhere with a more affordable housing market in order to stretch their savings.

With FIRE retirement, the money you save isn’t just sitting in a bank account. Even the highest-yielding savings accounts won’t earn enough money to keep you solvent during your decades of retirement. Instead, most FIRE adherents funnel their cash into the stock market, particularly low-fee index funds. The idea is to place your money somewhere it can reliably grow without the cost of brokerage fees that cut into your retirement income.

Money from stocks and bonds usually make up the largest share of a FIRE adherent’s passive income — that is, any income they can collect without having to exert much effort or time. Since early retirement is funded by passive income, FIRE forums and blogs are filled with debates over the wisdom of investing in real estate, what specific funds in the stock market to target and other ways to earn passive income.

Don’t get burned by FIRE

Pursuing early retirement with FIRE requires a specific mindset: you must be willing to sacrifice significant amounts of discretionary spending in the short-term in order to help you save enough to become financially independent at an early age. Beyond possessing the fortitude to pass up on those kinds of opportunities, a FIRE lifestyle comes with nontrivial risks you need to think through.

Because you’re dropping out of the workforce during some or all of your prime earning years and trusting a huge part of your financial security to the stock market, you stand to lose a lot if the economy tanks or markets melt down. For example, what if a financial crisis causes rampant inflation, which would devour the value of your portfolio at a much higher rate than you accounted for? Can your portfolio survive a stock market crash? What if you develop a chronic illness or suffer some other health catastrophe during your 50-odd years of retirement that completely depletes your savings?

FIRE practitioners would respond that pursuing early retirement means embracing flexibility, and that any damage done to a nest egg can be countered with adjustments in lifestyle.

There’s also the risk of obsessing over your FIRE retirement goal so much that you lose sight of why you want so much free time in the first place.

According to Adcock, “people spend years and years trying to get to [financial independence], and the struggle is part of the appeal.” However, he added, “if there’s nothing else in your life that you’re going to continue to strive for,” he added, “then [achieving FIRE] is very underwhelming.”

The bottom line on FIRE retirement

The dream of retiring early remains a fantasy for millions of workers for a reason — it’s extremely difficult to achieve. However, difficult does not mean impossible. FIRE retirement works because the idea underpinning it — you can retire at any age you want, so long as you have the money — remains a solid one.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here

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The Average Retirement Savings of Millennials Isn’t Enough

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

The Average Retirement Savings of Millennials Isn’t Enough

A new MagnifyMoney analysis of recent Federal Reserve data reveals that millennials aren’t saving enough for retirement. This might not be shocking on its own, but the data also reveals that the gap between what millennials have saved compared with what they should be saving is surprisingly wide.

To set our benchmark, MagnifyMoney used the guideline promoted by retirement industry experts, such as Fidelity, that workers should have roughly two times their annual income in retirement savings by age 35.

We then compared the earnings, savings and ages of millennials as reported in the Federal Reserve’s Survey of Consumer Finances to see whether they are hitting that mark.

Here’s what our dive into the data revealed about millennials’ retirement savings.

Key findings

  • The median 2016 retirement savings level for households headed by 30-somethings was about $23,000, while the median income level was $55,400. This means that typical millennials in their 30s have saved just 41% of their income.
  • Based on that level of income, median households should have saved $112,000, according to a common rule of thumb suggested by retirement plan administrators and financial planners. That’s almost five times more than the actual median savings of $23,000.
  • This shortfall isn’t specific to the current cohort of savers in their 30s (millennials). Prior surveys show a persistent shortfall in retirement savings among 30-somethings in previous generations, too.
  • While high earners are saving slightly more than median or average earners, they still fall short of retirement savings guidelines. Recent data show 30-something households with income at the 90th percentile — $146,000 — have saved roughly 1.1 times their income ($160,000) in retirement accounts when the rule of thumb suggests that figure should be $292,000.

Millennials are 80% behind on retirement savings


Unfortunately, millennials’ retirement saving efforts are far behind the recommended benchmark. The median income for workers in their 30s is $55,700 per year. This puts the retirement saving target at around $111,400 by age 35.

The actual savings are far behind that, however, with the median retirement savings at just $23,000. In fact, a typical millennial has saved only 40% of their annual income at age 35. This is just about one-fifth of the amount they should have saved. (Average retirement savings levels are similarly short).

Median earners in their 30s aren’t saving nearly enough. But perhaps more surprisingly, a better paycheck doesn’t seem to help much, as even high-earning households are coming up short.

High earners save more, but are still behind

High earners do a better job saving for their golden years than their median-earning peers. This makes sense, as higher-income households will have more funds at their disposal that they can use to save.

But even high-income millennials still fall short of the target of saving twice their incomes. Part of that is because earning more results in higher salaries, which also raises the target amount they should save.

In 2016, households earning at the 90th percentile — those earning about $146,000 or more per year — had saved $160,000 so far for retirement. That might seem impressive since it’s nearly seven times the $23,000 median retirement savings balance among their cohort.

But based on their level of income, the retirement savings standard suggests they should have close to $300,000 saved. Yet these high earners are around five years behind on their savings, having saved just 1.1 times their annual salary.

Of course, these numbers won’t reflect every saver’s individual progress. A household that falls in line with the median retirement savings of $23,000 with an annual income of $20,000 might actually be doing OK. Or they might earn $200,000, and be even further behind than most.

Other households might have their retirement savings right on target for their 30s or even be saving more aggressively with the aim of retiring early. Overall, however, it’s safe to say that millennials whose retirement savings are on or ahead of schedule are the exceptions to the undersaving trend.

Millennials’ retirement savings are on par with previous generations’

Millennials are way behind the ideal benchmarks for their retirement savings, and that’s worrying. But do these millennials have it worse than past generations?

We took a look at the historical Federal Reserve data going back to 1998 to find out how millennials’ retirement savings levels compared with previous generations’ savings habits.


As this chart shows, millennials are actually saving better than previous cohorts of 30-somethings. This could reflect the conservative money management attitudes found among many millennials. After coming of age in the Great Recession, this cohort saw the importance of personal fiscal responsibility.

The average retirement savings for millennials in 2016 is $64,000, which is 14% higher than the $56,000 30-somethings’ average retirement savings in 1998 (all figures are in 2016 dollars).

Interestingly enough, millennials are saving more without earning more than previous cohorts — U.S. wages haven’t grown much in that time.

On top of stagnant pay, millennials have also faced historically higher levels of student debt. The average student debt among recent graduates was $39,400, and a typical monthly student loan payment for a millennial is $351. With this student debt, millennials have had fewer discretionary funds they could use to make retirement savings contributions.

The fact that millennials’ savings habits are outpacing previous generations despite these financial obstacles is a promising trend, but it still might not be enough.

The guideline to have twice your salary saved by 35 is, admittedly, an aggressive goal — one that 30-somethings have been falling short of for the past 20 years. But it’s what millennials should be shooting for to ensure a comfortable and financially secure retirement.

How millennials can catch up on retirement savings

If you’re a millennial, you might be wondering how your retirement savings stack up — and if you’re behind, what you can do to make up for lost time.

The first thing to do is figure out where your retirement savings “should” be, according to this guideline. If you’re 30, this will simply be equal to your annual salary; for 35-year-olds, it will be twice that amount.

For every year in between or above, you can simply add on an additional 20% of your annual income. A 38-year-old, for example, should be shooting to have 2.6 times their annual income in retirement savings accounts.

Once you have your number, start planning for retirement and taking steps to catch up. Here are some ways you can start saving more.

  • Take advantage of employer-provided retirement plans. If your employer offers a retirement savings plan, such as a 401(k), it can be an easy and simple way to contribute through your paycheck.
  • Contribute enough to get the full employer match. Many employers will include retirement savings matching in their benefits package. This usually means that they will deposit extra funds into your retirement account to match your own contributions, typically capped at a certain amount. Find the details about your employer plan and contribute at least enough to take advantage of this full match.
  • Open an individual IRA. You don’t need an employer to open a retirement savings account, however. Almost anyone can open an IRA or Roth IRA and start contributing to it on their own.
  • Get debt costs and payments under control. If you have student loans, credit card balances, or other debt, these monthly payments and interest costs will limit your ability to save for retirement. Look for ways you can decrease the costs of your debt, such as consolidating credit cards or refinancing student loans to lower interest rates. Prepaying debt can also be a smart way to avoid interest charges and get rid of debt, freeing funds up to use for retirement savings.
  • Shoot to save 15% or more. As you might have figured out, saving a year’s worth of earnings every five years requires some intense saving habits. Of course, these funds will be invested and generate growth and returns that will do some of the work for you, so you can save a little less than 20% of your gross income. Saving 15% of your annual earnings is the typical suggestion.
  • Increase your savings rate a little at a time. If saving 15% feels out of reach, start smaller. Increase your retirement contribution rate by just 0.5%-1%. Then give yourself a few months to adjust, then raise it again and repeat until you’ve reached your target retirement savings rate. This method can help you ease into higher savings and find the right amount to balance retirement contributions with today’s costs.
  • Save “extra” funds when you can. If you’re behind on retirement savings, you can use extra income to play catch up. Instead of using bonuses and raises as more take-home pay, for instance, you can contribute this increase in pay to retirement savings.

It’s not too late to start saving for retirement, and every dollar you contribute now will count more than what you’d save later. That’s because saving for retirement in your 30s gives these funds over three decades to grow and for that growth to compound — time and money you simply can’t make up for later.

Take a look at your retirement savings and find one thing you can do to save more. Your future self will thank you.

Methodology

MagnifyMoney examined data from the Survey of Consumer Finances, a triennial report issued by the Federal Reserve, to determine relative retirement savings levels for various age and income ranges from 1998 through 2016 (the date of the latest study). We only include households with savings in at least one retirement account. All figures are in 2016 dollars.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Elyssa Kirkham
Elyssa Kirkham |

Elyssa Kirkham is a writer at MagnifyMoney. You can email Elyssa here

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