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Sept. 30 — Millennials face unique challenges in achieving retirement security. But these challenges can be overcome by a healthy and early commitment to savings, financial professionals say.
Millennials, generally pegged as those born from 1982 through 2000, often enter the workforce already saddled with large student loan obligations. In addition, scientific and medical breakthroughs mean it’s likely they will have longer lives and thus more retirement years to save for.
These obstacles need not deter millennials, as long as they develop a long-lasting commitment to savings, David Blanchett, head of retirement research with Morningstar in Chicago, told Bloomberg BNA.
“Saving isn’t fun and involves sacrifice,” but it’s a key component in gaining and maximizing wealth, Blanchett said.
“It’s important for millennials to start saving and investing early,” Wei Hu, vice president of financial research at Sunnyvale, Calif.-based Financial Engines, told Bloomberg BNA.
Financial Engines provides advice to plan participants and also provides managed accounts to retirement plans.
By investing early, millennials can take advantage of the power of compounding interest, whereby invested assets grow faster by generating earnings on the assets’ reinvested earnings, Hu said.
Seeking advice from an “unconflicted financial adviser who serves as a fiduciary” to those he or she advises is also important, he said. The adviser can help millennials figure out how much to save and how much risk to take based on their personal circumstances, Hu said.
One of the main investment tools for millennials and others is often their employer-sponsored 401(k) plan. Employers often match a portion of an employee’s contribution to these plans.
Employees who are eligible for these plans should first, if possible, commit to putting enough savings into them to get the full employer match, Blanchett said. An employer match is “free money” that millennials should be taking advantage of, he said.
Depending on the match, a plan participant is getting a return of 50 percent to 100 percent, Hu said.
After securing an employer match, Blanchett said that millennials should next be using their savings to pay off any high-interest loans, such as credit cards or other consumer loans. The highest interest rate debt should be the priority, he said.
Once a worker is getting the full employer match and has paid off high-interest debt, it would be appropriate to use savings to make extra student loan payments instead of adding that money to the 401(k) plan, Blanchett said.
As an example, Blanchett posed a situation in which a millennial was paying off a student loan with a 6 percent interest charge. He said that a millennial stands a good chance of getting a long-term return in the 401(k) plan in excess of 6 percent. However, each extra payment on the student loan gives a “guaranteed” 6 percent return that isn’t possible in today’s financial markets, he said.
Once high-interest-rate debt is paid off, millennials would be wise to earmark their savings to their 401(k) plan, he said. Millennials should strive to have about 12 percent of their salary in combined employer and employee contributions going into their plan investments, he said.
Hu said that 10 percent to 15 percent of salary would be appropriate for many millennials.
Most millennials won’t be retiring for many years and should be fairly aggressive in their 401(k) plan investments, Blanchett said. In fact, he said that for millennials, “the safest investment allocation isn’t a conservative one.”
A 30-year-old millennial, who won’t be retiring for 30 to 35 years, can afford to ride the ups and downs of the stock market, which historically has provided an annual return of between 10 percent and 12 percent, he said.
An allocation of 75 percent of plan assets to stock mutual funds would be about right for most millennials, he said.
Hu recommended an 80 percent to 90 percent stock mutual fund allocation for a typical millennial’s plan.
Joe Goldberg, director of retirement plan services for Buckingham Asset Management in St. Louis, told Bloomberg BNA that even stock allocations of up to 100 percent are appropriate for many millennials.
That’s because millennials are generally more educated and savvy about investments than older generations, he said. They witnessed equity market declines in 2008 and then saw them recover, he said.
On the other hand, millennials who have a very high savings rate can decide to be less aggressive in their investments, Goldberg said.
Blanchett recommended that millennials put their contributions into the plan’s target date fund, where it will be professionally managed. They can do that and then not “worry about it,” he said.
Goldberg cautioned that target date funds are useful and simple, but are limited in that they consider only a person’s age in assessing their risk threshold.
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