By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
Social observers and demographers coined the term “Millennials” for those (primarily Americans) who were born roughly between 1980 and 2000. That’s today’s 14 to 34-year olds.
Sociologists have suggested that Millennials have some very positive traits. They tend to be more open and inclusive and less judgmental about people than baby boomers or Gen Xers.
Recently, some interesting financial and lifestyle information has been gained about Millennials, though. Taken together, it is clear that members of this generation are making some financial decisions that could possibly hurt their financial security over the long term.
Here are three decisions that Millennials are making which could affect their financial security.
1) Investing too conservatively. According to an article on Bankrate.com “Cash is king for millennials” the average Millennial allocates 52% of their investment portfolio to cash. This is more than twice the rate of investors from other generations. Although they have many decades until they will need their retirement assets, their tolerance for investment risk is very low. This could be as a result of their experience during the Great Recession of 2007/2009. This overweight to cash could decrease the expected returns of their investments and force them to save more of their income than more aggressive long-term investors.
2) Starting their working careers with higher levels of debt. The high cost of college has led to increases in the level of debt taken on by college students. According to “The Project on Student Debt” 71% of college graduates in 2013 had student debt which averaged over $29,000. Many Millennials realize that they won’t be able to afford to buy a house with all of this debt unless they get a great job or live inexpensively so they can pay it down. This could slow down the purchasing of big ticket items like cars or new housing and shift this consumption until later in life. The more widespread this phenomena, the more it could slow the economy.
3) Getting married later … or not at all. According to the U.S. Census, in 2012 the average age at marriage in the U.S. was 29.1 years for males and 27.1 years for females. This compares to 22.8 years for males and 20.3 years for females in 1960. According to the Pew Research Center (“For Millennials, Parenthood Trumps Marriage,”) in 2010, 22% of Millennials were married as opposed to 29.1% of the Gen Xers who were married at the same age range. In addition, 9% of Milleannials were cohabiting compared to and 5.8% of Gen Xers. Again, this trend tends to shift both savings and consumption until later in life which may slow the growth of the economy over the long-term.
Demographics are an important factor in economic trends, expected investment market returns and capitalism in general. The Millennials are far different from the Baby Boom Generation and demographics in the U.S. are different from many of the emerging nations in the world (China, India, Malaysia, etc.).
Understanding the global marketplace is important for investors. Understanding risk and expected returns will be important for Millenials as they make major financial decisions throughout their lives. Given the past 15 years of boom and bust stock markets, it’s understandable that Millenials may be shy to commit their savings to more aggressive investments. But being ultraconservative just presents a different type of risk in not outpacing inflation or generating enough return to meet goals.