Millennials don’t pay for advice, but they need it the most

There is a common misconception that millennials don’t save and instead spend a lot of their hard-earned cash on things like Starbucks or avocado toast. But in reality, millennials, who were raised in part during the Great Recession, are financially conservative. I have found that millennials do in fact save, but they don’t always use the best vehicle for savings. Many members of this generation have chosen to put money into savings accounts rather than invest it. More than half of millennials — 66 percent — said they plan to rely on their savings accounts for expenses during the next 20 years, according to the 2017 Merrill Edge Report.

Millennials’ attitudes towards money were shaped witnessing family and friends struggle from 2008 through the early 2010s. Fearful of another recession, 80 percent of young adults expect to live through another downturn. They value the financial security that savings accounts offer, so they embrace a “do-it-yourself” mentality towards finances. Retirement is so far off that it can be difficult for them to visualize.

The reality is that millennials are missing out on significant retirement savings by keeping most of their earnings in regular savings accounts. Today, most savings accounts earn less than 1 percent a year, whereas the markets have steadily increased each year since the Great Recession. The average annual return of the S&P 500 has been between 11 and 12 percent during the past 40-plus years. Those who did not invest missed out on that growth and will need to save that much more to accomplish their retirement goals. A majority of this generation also do not have pensions, so it’s crucial to build up retirement savings elsewhere. 

Luckily, millennials have time on their side. The earlier they start to save, even if it’s a small amount, the more they’ll have at retirement due in part to compounding interest. Compound interest, which is when interest earns interest, plays a major role in building up retirement savings. The money initially invested earns interest, and over time that interest is reinvested and starts to earn its own interest.

I recently met with a younger client who had built up $50,000 in cash (imagine if he had invested!). He was interested in determining the best place to put this money, but we first had to prioritize his financial goals. Young investors in particular have a lot of competing financial priorities, from paying off student loan debt to saving for a down payment, putting money away for their children’s college tuition or funding their own retirement. With so many priorities, it can be difficult and overwhelming to know where to start.

This client’s primary goal was to use his savings to purchase a home in the next few years. If my client had gone ahead and invested the cash on his own, he would have most likely put it into an investment that did not align with his risk tolerance or the time horizon for when he would need the money. Investing his money too aggressively would have put it at risk of not being able to withstand a large loss in the market. By prioritizing his financial goals, we were able to determine that the best course of action was to purchase high-quality bonds that would mature when the money was needed. 

By working with an advisor, millennials receive a level of detailed guidance they won’t get from an app or through a savings account. Advisers can help guide them through the up, and yes, the down markets they are likely to experience in a lifetime.

Advisers can help create a plan that is unique to each client’s own situation. While millennials are able to crowdsource so many other decisions — from finding the best taco joint to getting feedback on a new business idea — a financial plan shouldn’t be based on what others do with their money. I often see young clients make financial decisions based on what someone close to them does, whether that be choosing a particular investment or deciding how much to put into their 401(k). It’s important to remember that friends and family have different financial goals and circumstances. What is right for them may not be right for you.

An adviser can also help address important financial decisions that far too many of us leave until it’s too late. I’ve even helped connect investors of all ages with legal advisers to establish a durable power of attorney and advanced medical directives as well as help look into purchasing appropriate long-term disability and umbrella liability policies. These might seem like decisions that can wait until someone is more established in a career and in life but setting them up early can help prevent unexpected events from wrecking finances.

Financial success requires long term planning. Starting towards the beginning of a career will put millennials in the best position. The guidance they get, or choose not to get, about their financial plan will impact the rest of their lives.

Matthew Anderson is a senior vice president and financial planner withThe Wise Investor Group at Baird in Reston.