The Beginner’s Guide to Investing for Millennials
Millennials are those born in American between 1981 and 1996. It hasn’t always been that specific of a birth range. In the past it has varied from a few years before 1981 to a few years after 1996. However in March of 2018 the Pew Research Center put out a report defining officially this birth range as the millenial generation.
If you were born in 1981 that means you are approximately age 37 and if you were born in 1996 you are approximately age 22. Those in this age range perhaps have already had the opportunity to start investing for their future. Other have not.
For those getting started with investing, whether that’s investing in the stock market, a retirement plan through an employer, a house or investment property, or even investing further in yourself, perhaps this article offers some beneficial perspective as you make financial decisions.
First Pick Your Relationship with the IRS
If you have reached the point where you have extra cash flow each month. You can direct, or you have built up money beyond your emergency reserve. Then it’s generally time to start investing. But before you choose what asset classes or how much risk to take; you have to decide what relationship you are going to have with the IRS.
This tax relationship may last for the rest of your life. So be sure, it’s an important one. If you choose to invest money in a tax deferred retirement plan like a 401(k), IRA, 403(b), or TSP you will generally be getting a tax deduction for doing so. That means your income will be lowered by what you defer into these accounts.
However the agreement is that same dollar that was deferred, and every dollar it makes while its invested in that account will be taxed one day as income in the year the money ends up back in your pocket via a withdrawal. Additionally, any money you defer in most instances can’t be withdrawn prior to age 59.5 without a 10% penalty.
So if you are in this age range of 22 to 37 that means by choosing this relationship not only are you committing to paying taxes to the IRS at some point in the future but you are committing to not touch the money for between 23 and 38 years.
Investing For Millenials Is Best Done Over Time
To someone just starting out who may have other goals like buying a house, starting a family, paying down debt or starting a business, this commitment to give up control of hard earned savings for decades may not feel comfortable. The traditional advice of starting a 401k as soon as you can stands with its advantages but any investing over time has the potential to help you grow your money, so if you feel you may need access there are other options like investing after paying tax first in what’s referred to as an individual account.
Once you pay taxes on your income and deposit the extra in an account like this the IRS poses no time limit requirements on leaving it there. You can take it back for any reason. There are downsides however which is if the investment goes up in value by the time you sell it you could owe capital gains taxes, and if it pays any dividends or interest income in the interim those have to be reported on your tax return annually.
Understanding Your Strategy
Once you have decided this relationship then you can assess how much risk. This includes the types of investments to choose. There are no universal answers here. Someone who’s comfortable with the market’s volatility may benefit over the long term. Someone who prefers income-based investments may avoid the large drops. On the other side of the coin they may feel motivated to save more to stay on pace.
What’s important is you understand what you are invested in, and the strategy either you are choosing or the one being laid out for you by a trusted family member or advisor. If you are working with an advisor you can inquire about the level of volatility you should expect from your current allocation.
What is its deviation and how often can the returns, mainly negative ones, exceed that expected range. There are also online tools now you can enter the positions you own to calculate this expected volatility.
Investing in Your Home
Your home may or may not be considered an investment depending on whose perspective you take, but you will be living somewhere. So by investing here we simply mean making financial decisions regarding your home that consider your long term future. In your future you likely want to be retired.
Being retired generally means not having a mortgage, so continually refinancing that mortgage will keep you 15 or 30 years away from that goal depending on the type of refinance you choose. If you are a millennial and between ages 22 and 37 that may not matter too much right now, but if it happens as you age you could find yourself closer to retirement and a mortgage that will extend well past your ideal retirement age.
Mortgage Calculators Are Your Friends
A strategy against this is to do a calculation to determine how much extra you need to apply each month to your mortgage. This helps you to pay it off by your ideal retirement age. For example if you are 35 with a brand new home and 30 year mortgage. Ideally you want to retire by age 62. Your mortgage generally can be paid off in 27 years rather than 30.
That doesn’t mean you have to refinance. You just need to pay a little extra each month over time. This calculation can be done using online calculators. With the help of a mortgage broker, or a financial advisor You can get additional help with the calculations.
Other ways you can invest in your home is to do projects. This not only makes it more customized to you, but extends the time frame you would feel comfortable staying in the home. Feel like you could retire in your current hom? Maybe if it just had a master bedroom on the main level? Or perhaps had an addition for more space? What about a new kitchen? Then those can become your goals to save up for. Not only do they increase your value, and standard of living, they possibly extend your time in the home. A home without a mortgage payment is like people trying to extend how long they drive a car without a loan.
Investing in Yourself
Lastly one thing that appears clear about the millennial generation is they will be working longer. Even more so than prior generations. This is due to the fact that entitlement programs like Social Security and Medicare won’t be as reliable. It’s likely that current retirees will get the most out of these programs. Saving for retirement is difficult due to rising households costs, and simply due to people living longer so therefore wanting to contribute longer.
Simultaneously to that, our economy is becoming more specialized. Due to very specific skills in certain industries in high demand, and other skills that used to employ millions now being at risk of becoming extinct or automated. So securing a well paying job now is important. Yet, so is staying on top of trends in your chosen industry as it changes, or interestingly the industry you might like to transition to as you age.
What About Careers?
Some careers make for great incomes and standards of living. Especially while one is in there 40s and 50s. But, this doesn’t necessarily translate to good jobs. You may need to do part time work from home while you are trying to slow down and enjoy life. Other careers are actually the opposite.
They may not pay well, but they can provide earnings for as long as you enjoy the field. They are also willing to contribute, thereby preserving your retirement assets. Thus, increasing your Social Security checks through deferring the payments, and offer a social interaction you may find enjoyable as you age. So in addition to climbing your corporate ladder, consider what skills, certificates, experience, or network you might need to find your corporate hammock.
It’s never too early to start this process because you might find you want or need to transition. to this type of employment earlier than you think. Either due to health events, or perhaps because you did such a good job saving you can switch over to the low stress job earlier than you thought and it simply provides the meaning you always wanted in a career.
Do you think investing for Millenials is necessary for their success? If so, please comment 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.
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