Money Mondays: Millennial Retirement Mistake

Money Mondays: Millennial Retirement Mistake

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The mistake stems in part from a mistake many people make when they are young: they put off saving for retirement because retirement seems so far away. But for many millennials, they are exacerbating this problem by making a big mistake when they do start saving: they are avoiding the stock market. And over a lifetime, it could mean they lose out on a lot of money.

Why are millennials avoiding the stock market?

The biggest reason many are avoiding the stock market is because they came of age during the financial crisis and the housing correction, and the resulting Great Recession. They watched their parents or other family members struggle with the market downturn and other negative economic consequences during this time. And it left a deep impression on them. Not wanting to put themselves in this position, they are avoiding the stock market, and keeping their money in savings accounts instead. Only one in three Millennials say they invest in stocks, according to a survey. And six in ten have less than $10,000 saved for their post-working years, according to Ramsey Solutions’ 2016 Retirement in America Survey.

Is anxiety or risk-aversion the only reason they are not investing?

Anxiety is not the only reason. Early in their careers, millennials are also more cash strapped than previous generations. Student loans and other education-related debt is playing a role. Median education-related debt is $19,978, according to a 2016 Wells Fargo Millennial Study. College loan balances for those between ages 18 and 34 are nearly triple what they were in 1989, according to the Census Bureau. Additionally, the Great Recession meant that many millennials took longer to get their careers off the ground.

You say avoiding the market is costing millennials. How much money are we talking?

Millions of dollars, Tom. A recent NerdWallet study compared the financial outcomes of three paths for a 25-year-old today: investments in stocks, placing your money in a savings account, and keeping your savings in cash. The study assumed a salary of $40,456 a year – the current median income for that age, annual raises of 3.7% to keep up with inflation, and a savings rate of 15 percent of annual income.

The findings are eye-opening. If this 25-year-old invested in stocks, they could potentially accumulate $4.57 million over 40 years, before adjusting for inflation and after accounting for annual investment fees of 0.70%. If the same individual kept their money in a savings account, they would have just $1.27 million after 40 years, before adjusting for inflation. That is a difference of $3.3 million dollars! And if this same individual had kept their money in cash, they would end up with $563,436 saved over a 40-year period, over $4 million less than if they had invested in the stock market.

The study “used 40 years of inflation data, Standard & Poor’s 500 returns, and three-month Treasury rates — a proxy for historical savings account rates, to determine the potential accumulation in each scenario.

What would you tell millennials and others who are not sure how to proceed?

First, I would simply tell them to listen again to the numbers I just mentioned. While the stock market does have corrections and periods of volatility, the long-term record of the stock market is astounding. The difference between a stock portfolio and a savings account can mean millions in lost returns.

Second, I would tell them not to be intimidated by the fact that investing can seem risky or complicated. It can seem big and complex, but there are resources out there. If your company offers an employee retirement plan, reach out to your human resources department for assistance. If you do not have that option, you can reach out to companies like mine. Investment companies will be happy to talk to you. Ask questions, and do your own research. At first it may seem hard to tackle, but you will feel more comfortable as you learn more about it.

Finally, I would tell millennials to start investing now. Inertia is a powerful thing. If you are not investing now, it is an easy habit to fall into. Do not do it. Start investing, even if the amounts are small. It will pay off in a big way over the long term.

Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts.  Additionally, she is a regular financial contributor and analyst for CBS News and

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