Millennials have it rough. The generation before them calls them lazy and entitled, while asking for help using their smartphones. They have the generation after them taking advantage of technology like never before. Their lives are more expensive than prior generations, and they may have to plan for a longer retirement, with less job security in which to save for it.
There are no perfect answers to accomplishing your goals. But there are a lot of positives to look at as well. Here are some tips to consider to avoid the major pitfalls on your road to investing success.
Millennial Investing Mistakes
Not Diversifying – There are a wide variety of investment options these days – kudos to the growth of global capitalism. You can now allocate your hard earned money to tens of thousands of mutual funds or ETFs, which give you exposure to U.S. stocks, international stocks, emerging markets, specific industries, leveraged positions, hedge funds, real estate, commodities, currencies, and government and corporate bonds from all over the world. This doesn’t imply that any of these asset classes are inherently better than another or should always be part of your portfolio, but the days of buying an S&P 500 fund and calling it a day are probably over.
Not Taking Enough Risk – Some people aren’t born investors. They don’t feel comfortable with money fluctuating a great deal. The stock market isn’t for everybody. What’s important is knowing there are options that still allow the potential to grow your money.
However, these options may require a little more diligence and research to find. That is where trusted friends, coworkers, family, banks, accountants, and financial planners come in. Learn what’s available, ask questions, and see what works for you. Millennials are still decades away from retirement and might be looking at decades while they are there. Growing your money through compounding will help.
Not Understanding Your Investments – Similar to those striving to feel comfortable in their investments and the amount of risk they are taking, it’s also important to be aware of how the global economy might affect your holdings. For instance, if you hear a news story about a company achieving a financial goal or coming out with new technology – see if you own it.
Considering applying for a job at a big firm in your area? Look up whether you are invested in it. You can mention it during the job interview. It isn’t just to work toward maximizing your potential return, it’s about learning about the world around you and using that information for your benefit.
Investing Against Your Beliefs – This is a big one for those who consider themselves politically or environmentally active. It’s possible you could own stock of companies in your 401(k) or IRA that are the same ones you are marching against or calling your politicians about. In fact, if you own large cap or small cap U.S. stock fund; it’s probably likely.
Big oil, big banks, fracking, companies owned by politically active CEOs, gun companies, and so on are all a part of the major indexes, which means they can end up in the mutual funds you buy. This isn’t meant to convey whether they are good stocks to invest in or not. But if you don’t want to support their business models, it starts with not being an owner of their company.
Choosing between IRA & Roth IRA & 401k – Any savings is generally good for your financial future. If you are employed and work for a company that offers a retirement plan, whether a 401(k), 403(b), 457, TSP or SEP IRA, or SIMPLE IRA, you actually have the decision each year to invest in that, direct your money to an IRA or Roth IRA, or even split it between the two. Your choice is a tax decision, but it’s also an access decision. Plans through your employer, like the 401(k), may offer loans if the money is needed. Other plans may not.
IRAs may or may not provide an income tax deduction depending on your income level for the year, but don’t offer loans and rather limited other circumstances where you can avoid penalties when accessing the money. The Roth IRA has options built in that allow some access, thereby making saving perhaps a little easier for young people concerned they may need access to it for something prior to retirement. Check with a tax advisor annually on which of these plans makes sense for your tax situation.
Not Funding an HSA If Available – Health Savings Accounts are one of the best vehicles in the tax code. Not to say high deductible health plans are the best thing going – there are some drawbacks. But if you already have a high deductible health plan, then you can open an HSA and save money for future medical costs. You can deduct the contributions, in some cases invest it, and then withdraw it at any point like an FSA.
Not Insuring Yourself – Although this is an article about investing for your financial goals, your largest investment is likely yourself. Your ability to earn a living is the number one thing that will help you meet those goals. If that machine doesn’t work, then everything else can fall apart.
Things like life insurance, disability insurance, critical illness, and even long-term care insurance are important. Some of these you can get through work. Some may be offered but aren’t comprehensive enough to really provide peace of mind. That’s where shopping around, and talking to insurance agents comes in. Make sure you research what is available and affordable.
Millennial Retirement Planning
Ignoring Social Security – Millennials, for the most part, won’t retire for a few decades. If assuming Social Security will be a thing of the past by the time you get there motivates you to save even more or take steps to build wealth other ways, then great. But Social Security going away entirely in your lifetime is a rather drastic scenario that may not play out at all. It’s perhaps likely there will be changes to the program like pushing back when you can start benefits, or the amount you receive, but less likely it will be taken away entirely.
No one knows what the future holds with this massive program, but following the news is helpful for planning. In the meantime, tracking your benefit online at www.socialsecurity.gov is important, so you are aware of disability benefits if needed, and to ensure your earnings record is at least accurate.
Ignoring Your Home – Accumulating lots of investment assets may not be in the cards for many millennials. Cash flow just doesn’t always allow it. But home ownership is more prevalent as a goal, and is just as vital to your retirement plans as your 401k.
Thinking of your home in the context of retirement planning typically puts you in one of two camps. Either wanting to retire while in the home where you currently reside, or your next home perhaps, or planning on moving from that home to your retirement destination. Either way, tracking the value, and the pace you are on to pay off the mortgage are relevant. Assess the age your mortgage will be paid off at your current payment plan, or if you plan to move, how much equity you might have in the home by the time you liquidate.
Not Staying Busy – Retirement is a long way off and there is a lot of work to do. But what the generation ahead of us has shown in several studies now, is that those who stay active thrive, and those who don’t, age quickly. This could be part-time work, in which case, you should start thinking about the skills and experience you will need to get that job in the future, now.
The most common theme in these tips is education, and earning about the investment and financial world around you. Ask friends, advisors, accountants, estate attorneys, career counselors, or even perhaps your parents. They may end up knowing more about this wealth planning topic, and life, than you ever imagined.
What millennial investing mistakes have you made? Tell us more in the comments below.
Brian Kuhn CFP® is a financial planner and writer based in Fulton MD. He is the author of “Total Compensation: A Practical Guide to Federal Employee Benefits” and “The Personal Finance Handbook,” a Guide to the Most Common Personal Finance Questions.” He is available at www.PSGClarity.com and @IRAGuidance on Twitter. No content in this article should be construed as a specific investment recommendation. Securities offered through Triad Advisors, Member FINRA / SIPC. Advisory Services offered through Planning Solutions Group, LLC. Planning Solutions Group, LLC is not affiliated with Triad Advisors. PSG Clarity is a division of Planning Solutions Group, LLC.