Facts:

• Contrary to popular belief, Millennials are saving.
• As a group, they are more risk averse than other generations and are more likely to prioritize debt repayment over investment.
• On average, the group needs to prioritize their emergency fund saving.
• They expect to retire earlier and live longer than their parents.

Many generalizations have been made regarding the differences between millennials and prior generations. As a millennial myself, I think we often get a bad rap when our generation’s tastes and preferences are extrapolated out into sweeping statements designed to be click-bait headlines. How many articles have you seen with the title “Millennials are ruining ­­­­ (fill in the blank)?” I usually find these generalizations to be no better than any other stereotype- heuristics used by one group to describe attributes of another with little regard for accuracy and no regard for individuality or nuance. Furthermore, I have repeatedly read articles stating one thing (“Millennials don’t want to live in the suburbs,” for example) which are then refuted a few years later (“Millennials are having children and moving to the suburbs”).

The Pew Research Center identifies the millennial generation as those born 1981 and 1996 (pewresearch.org) adding “…generational cohorts give researchers a tool to analyze changes in views over time. They can provide a way to understand how different formative experiences (such as world events and technological, economic and social shifts) interact with the life-cycle and aging process to shape people’s views of the world.” These birth years were highly relevant to the way millennials view money because many in this group were old enough to remember seeing their parents go through the dot-com bubble in 1999 and then saw the Global Financial Crisis (GFC) in 2008. Even the youngest members of the millennial generation were 12 years old during the GFC. Personally, I started studying economics during the heart of the GFC and this “great recession” absolutely shaped my views and the way I learned about economics.

While there is certainly a lot of bluster surrounding all topics millennial, there is broad agreement that these two major events were very impactful to the generation and the statistics bear that out. I thought it would be useful to use some of these statistics to highlight the different views millennials hold, disprove some of the generalizations that have been made about millennials and their money and highlight some areas in which our generation needs some help.

Savings

I often hear that millennials are not or cannot save money. Neither of these statements are true. The root of these arguments is that the millennial generation left college saddled with loads of student debt and any money that would normally flow to savings is instead flowing to student loan payments. While the amount of student loan debt has increased dramatically over the past decade (the Motley Fool notes total student loan debt was up 186% between 2007-2017 (fool.com)), the average household debt among households with student loans was a relatively modest $49,905. This is only slightly higher than the average amount of auto loans plus credit card debt among households with these types of debt. Nevertheless, $49,905 is a lot of money to most people.

The good news is that despite high levels of student loan debt, millennials are, in fact, saving.  A Harris Poll conducted for the Transamerica Center for Retirement Studies (forbes.com) found that 71% of millennial workers are saving for retirement and they started at a median age of 24. This is substantially earlier than Generation X’s median age of 30. The same study also found that 39% of millennials are saving more than 10% of their salary. Furthermore, one in six millennials have $100,000 or more saved.

Accurately describing millennials’ views towards saving money requires a bit of nuance. Millennials have debt, but they are also saving. However, retirement savings for the group as a whole is not a priority over debt repayment. The Transamerica study found that 67% of millennials said paying off debt was a priority, while only 45% said retirement savings was a priority. I believe this is one important way in which the views of the generation were shaped by the dot-com bust and the GFC. Regardless of generation, these events had a way of lowering many investors’ risk tolerances. Paying off debt is an easy way to earn a “guaranteed” return in the form of less money paid towards interest in the future (See my previous article about this here).

Investment and Risk

It is clear from a variety of data points that millennials tend to be more risk averse than prior generations. Bankrate published a study in July 2018 (bankrate.com) asking participants which asset class they preferred to invest money they wouldn’t need for 10 or more years. Options included cash, stocks, real estate, precious metals, bonds, and cryptocurrency. Millennials were the only generation where a plurality of respondents chose cash as the most favored investment. A plurality of all other generations chose stocks as their favored investment. To be fair, millennials’ second favorite investment was stocks, but the difference between generations is notable.

Additional statistics support the notion that millennials are on the conservative side when it comes to investing. The Forbes.com article cites several surveys all indicating risk aversion:

• 42% of Millennials are investing conservatively, compared with 38% of Generation X investors and 23% of baby boomers, according to the Fidelity survey.
• Millennials held 25% of their investments in cash, compared to 19% of investors overall, according to a Charles Schwab & Co. study of client data.
• 20% of Millennials say their retirement money is invested mostly in bonds, money market funds, cash or other stable investments, compared with 15% each for older generations, according to Transamerica.
• 66% of people aged 18 to 29 (and 65% of those 30 to 39) say investing in the stock market is scary or intimidating, compared with 58% of those aged 40 to 54 and 57% of those 55 and older, according to an Ally Financial survey.

It is perfectly logical that a group that is clearly more risk averse than prior generations would be focused on debt repayment (representing a “guaranteed” return) than getting their money invested. The higher levels of student debt surely increase this bias towards debt repayment as well. However, an overemphasis on debt repayment and conservative investment choices have an opportunity cost in the form of foregone returns.

Emergency Funds

Financial planners generally recommend 3-6 months of expenses be held in cash for use in emergency situations. These are funds available when the unexpected happens- the loss of a job or a large car repair bill for example. A robust emergency fund allows you to avoid using other methods like credit cards to meet emergency needs and helps you avoid the associated interest charges. The Transamerica Survey found that about 25% of millennials have less than $1000 saved for emergencies with a median level of around $2000. Across all generations the median level is about $5000- inadequate emergency funds are very common- but millennials as a group have some work to do just to get up to the $5000 median level across all age groups.

Retirement

The Transamerica survey found that 58% of millennials planned to be retired at age 65 while about two-thirds of Baby Boomers expected to work past that age. Another third of Millennials expect to retire even earlier. Millennials also expect to live substantially longer than their parents with 18% expecting to live past 100. All this adds up to a substantially longer retirement than previous generations, which obviously requires more money to fund.

The Upshot

Looking at all this data from a financial planning perspective gives me pause. While these statistics and survey results certainly don’t represent the personal financial situation of any one person, the behaviors of our generation seem incongruous with our goals. Millennials are saving for a long, expensive retirement, but prefer low risk, low return assets like cash. We are making prudent, low risk decisions to pay down debt, but increasing risk with inadequate emergency funds. In many ways, these behaviors are no different than the choices made by our parents and grandparents and by some measures, millennials are doing better than their parents (starting retirement savings at an earlier age, for example).

What I see is a generation that witnessed multiple large financial events that occurred at critical times in their parents’ or their own lives. They saw their parents retire right at the beginning of the Global Financial Crisis only to have to go back to work when their retirement accounts dwindled. They graduated college right at the start of the recession and had to settle for a job for which they were overqualified. Instability in the economy or the stock market is scary, and these events tend to leave a scar. It is understandable that many feel fearful about investing. My recommendation? Make a financial plan. A CERTIFIED FINANCIAL PLANNER™ can help you clarify your goals and let you know what it will take to reach those goals. Planners consider possible adjustments that can be made to savings, debt repayment, and investment strategies in order to reach your goals. Investing is not an “all or nothing” proposition. A planner can help you determine the right amount of risk to take- a level where you have a good probability of achieving your goals with a reasonable level of risk for you. Having a strategy in place and executing that strategy is easier than guessing and going it alone. Take partners. Make a plan.

-Robert Sokolowski