It’s February 1st, which means 75% of all New Year’s resolutions are now forgotten. By year end, only 8% will be accomplished.
Which side of the statistic coin do you fall on? Are you still on track or are your goals long forgotten? For the millennials who set a financial New Year’s resolution, we have some direction.
First, what is the financial profile of a millennial?
Last summer, TD Ameritrade surveyed 1,519 Americans between ages 21 and 37 -millennials- about their attitudes toward money, retirement, and life.
Here are the troubling results:
· The average respondent expects to start saving for retirement at age 36.
· 56 is the desired retirement age for the average surveyed millennial.
· 53% of millennials anticipate becoming a millionaire at some stage of their lives.
· Only 50% invest in the stock market, either through an employer retirement plan or brokerage account.
Why are these results troubling?
The goal of becoming a millionaire over 20 years of savings is a tough hurdle to jump. The annual savings needed for a 36-year-old to accumulate $1,000,000 by age 56 is $36,536.35. That is extremely unrealistic for most Americans. In addition, this assumes a 7% return and millennials are not fans of the stock market, a necessary condition for returns close to 7%.
In order for a $1,000,000 portfolio to last for 30 years, it must be invested in a balanced portfolio (60% stocks) and withdrawals should not exceed 4% of the portfolio balance. Thus, the income the 56-year-old can expect from the portfolio is $40,000 per year before-taxes. If the savings is in a tax-deferred account, such as a 401(k), there are taxes on the withdrawal.
$40,000 may sound doable, but that amount is not in today’s dollars. The $40,000 withdrawal is 20 years from now. Assuming 3% inflation, the $40,000 in portfolio income is equivalent to $21,500 today. Or $1,792 per month.
Millennials face the reality of working longer, saving earlier, and reducing their income expectations in retirement. These are the real constraints our clients face as they mold their economic reality around their financial goals.
But, it’s achievable for young savers. If $1,000,000 saved is the goal, $18,200 annual savings is needed between 30 and 65, assuming a 7% return. That is much lower than the $36,000 savings rate from above.
For today, to get started, we suggest beginning investors start small. Building retirement monies is similar to losing weight in the sense that small increments accumulate, and quick solutions do not work.
Not-so-fun fact: Humans that use eating restrictions to lose weight actually gain weight over time. The reason: calorie restriction is difficult to consistently maintain.
If you’re starting from $0.00 saved each month, let’s start small and gradually increase monthly savings until meeting goals is on track. In Switch, co-authors Chip and Dan Heath describe our reluctant selves as elephants: “If you want a reluctant elephant to get moving, you need to shrink the change.” They continue:
Think about it: Does picking up an undershirt off the floor and tossing it in the hamper inspire dread? Nope. Nor does rinsing out a glass and putting it in the dishwasher, or putting a single folder in the filing cabinet, or spraying glass cleaner on the bathroom mirror. So why does dread emerge from a combination of individual actions that seem pretty dread-free? Partly it’s because we fear that, in order to “clean house” properly, our work must (by definition) end with a house that’s clean. And when we envision our way to that end state, picturing all that we will have to conquer to get there – the closets and dishes and carpets and toilets and floors – we simply can’t bear opening that door. It feels like too much.
A strategy to overcome the elephant and clean: “5-minute Room Rescue.” Set a timer for 5 minutes and go to the worst part of the house and clean until the timer goes off.
To get the elephant off its duff, you need to reassure it that the task won’t be so bad. Look, it’s just 5 minutes. How bad can it be?
It’s time to overcome the elephant and begin your path to financial success. We understand the hurdles millennials face today and offer a Beginning Investor Program aimed at influencing small incremental change in your finances. We welcome the opportunity to serve your financial needs today and well into the future. Contact us to learn more.