By: Gene Walden, Senior Finance Editor September 24, 2019
Millennials are a diverse generation with many interests, but “retirement planning” is typically nowhere near the top of those interests.1 Strapped with lower wages and higher student debt than the generations before them, Millennials often have more pressing financial worries than retiring about 25 to 40 years down the road.
But as they’ve gotten older – and better compensated, Millennials have begun to show a growing interest in the markets. If you’re a Millennial, putting some of your money to work now could help you achieve your financial aspirations.
So how can you build wealth in the market?
- Take advantage of opportunities where you work.
- Start now to maximize your returns. (You don’t need a lot of money to get going.)
- Consider your investment options and your short- and long-term goals.
Invest at work
If you work for a company that offers a 401(k) or other tax-favored investment program, you should contribute as much as possible to your plan. The money contributed to a 401(k) retirement plan is deducted from your current gross income for tax purposes, thus typically reducing your income taxes in the years you contribute.
Your investments within the plan grow tax-deferred until you withdraw the money (typically after you retire and may be in a lower tax bracket). Many companies also match all or part of employee contributions. By not taking advantage of your employer’s 401(k) plan, you could be leaving money on the table.
If your company doesn’t offer a 401(k) plan, you may be able to receive a similar tax advantage by contributing some of your wages to an Individual Retirement Account (IRA). (See: Don't Miss the Tax and Savings Benefits of an IRA)
Sooner is better
With student loans and other debts to pay, you may find it hard to come up with any money to invest. But you don’t have to start with a big investment, and the sooner you start, the more time you’ll give your investments to potentially grow and compound. For instance, you can open a mutual fund account with as little as $50 a month through the Thrivent Mutual Funds automatic investment plan.2 (See: Building Your Nest Egg on $50 a Month)
Over the long run, even a small investment may bring big results. Putting just $50 a month into an investment plan that earns 5% to 10% per year could help you build a nest egg of $7,600 to $9,600 in 10 years, $20,000 to $36,000 in 20 years, $40,000 to $100,000 in 30 years, and $74,000 to $279,000 in 40 years when you may be ready to retire. (See charts below.) (These examples are hypothetical for illustrative purposes only. They are not intended to represent the performance of any particular investment product, nor do they take into consideration any product expenses or fees. The results would be reduced if the costs were included.)
Longer timeline may favor more aggressive strategy
With 25 to 40 years before retirement, you have more time to ride out the ups and downs of the market. While markets may be volatile in the short term, their performance tends to even out over the long term as the economy moves through its various cycles. Stocks may lose value in any given year –not all equity investments increase in value, and may, in fact, lose money. But over the past 50 years, the Standard & Poor’s 500 Index of large capitalization U.S. stocks has grown by an average annual rate of about 11%.3 Although you can’t invest directly in an index, you can invest in mutual funds that invest primarily in stocks that, in some cases, may provide returns similar to the performance of the index.
There are four key areas of equity fund investing: large capitalization funds, mid-cap funds, emerging growth funds, and international funds. Investing in an equity fund would give you a strong position in the stock market, but investing a portion of your savings in each type of fund would give you broader diversification, with a stake in large, medium and small companies, as well as foreign companies. As you develop your investment strategy, consider your overall portfolio, financial situation, investing experience, and investment objectives.
Investing for interim goals
Retirement is only one of many life goals that may benefit from early saving or investing. If you plan to buy a house, a new car, a boat, a cabin, or any other large-ticket purchase, starting a savings or investment plan may move you toward your goal more quickly. If you have children, you may want to start an investment plan to help fund their education by contributing to a Coverdell Education Savings Account, 529, or Roth IRA. (See: Start Your Education Savings with a Coverdell Plan)
Shorter-term goals may mean a less aggressive investment strategy. If you hope to use your investment savings in the next five to 10 years, you might choose a more moderate and diversified mutual fund, such as an asset allocation fund that invests in a diverse portfolio of stocks, bonds, and other investments. Although diversification – with several asset groups feeding into the performance of the portfolio – does not eliminate risk, it may help reduce losses during stock market fluctuations.
(Thrivent Mutual Funds offers four asset allocation funds that are automatically diversified and range from moderately conservative to aggressive.)
Just do it
While investing may not be appropriate for everyone, a good first step in building your financial future would be to launch an investment plan. Millions of Americans of all generations have invested in the market through 401(k) plans, IRAs, and personal accounts. The sooner you start your investment plan, the sooner you’ll begin to learn the nuances of the markets. (See: What’s holding you back? Investing may be easier than you thought)
Millennials have already put their imprint on the culture of our society. As their role in the workforce increases and their wages rise, Millennials are likely to follow the lead of the Baby Boomers and Gen Xers by assuming a growing presence in the investment markets.
1 Urban Land Institute: Generation Y: Shopping and Entertainment in the Digital Age, 2013
2 New accounts with a minimum investment amount of $50 are offered through the Thrivent Mutual Funds “automatic investment plan.” Otherwise, the minimum initial investment requirement is $2,000, with a minimum subsequent investment requirement of $50 for non-retirement accounts. For IRA or tax-deferred accounts, the minimum initial investment requirement is $1,000 and the minimum subsequent investment requirement is $50.
3 New York University, “Annual Returns on Stock, T.Bonds and T.Bills: 1928 – Current”
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