I'm in my 20s and would like to start taking steps to ensure a secure retirement and financial future. But like many people in my generation I'm confused about where to start, who to contact and what to do. Can you point me in the right direction? --S.V.
I'm not surprised that you're confused. Now that your generation has become a prime target audience for the financial industry's products and services, hardly a day goes by that one study or another doesn't purport to offer insights into what Millennials are doing, should be doing or shouldn't be doing about their finances.
Unfortunately, these insights aren't always consistent. Some surveys claim Millennials are poor savers; others say they're more diligent than boomers. Some research warns that Millennials are investing far too conservatively. Yet stats from the Employee Benefit Research Institute's report on 401(k) allocations shows that people in their 20s and 30s have, on average, about 75% of their retirement savings in equities, which seems reasonable for young workers.
So the first thing I'm going to suggest is that you tune out this welter of mixed signals about the financial habits of Millennials and the conflicting advice it generates, and focus instead on what you as an individual should do to improve your financial outlook. Because ultimately it's the actions you take on your own, not what Millennials as a group may or may not do, that will determine whether you achieve the secure financial future you seek.
With that thought in mind, here are three tips to get you started on the road to financial security:
1. Develop the savings habit. Given the amount of attention the financial press devotes to the ups and downs of the market and the fortunes or misfortunes of specific companies and investments, you can easily get the impression that savvy investing is the key to financial security. In fact, although investing is important, saving is far more crucial. If you don't save on a regular basis, all the investing know-how in the world isn't going to amount to much in the way of financial security.
Your first savings goal should be to accumulate three months' or so worth of living expenses in a secure place, such as a savings account or money-market fund. You're not going to earn much on this stash, probably less than 1%. But the idea is that you don't want to put this money at risk; you want it all available to you regardless of how the financial markets are doing should you need it for an emergency or to get you through a job layoff, etc.
Once you've got that emergency fund, you can concentrate on long-term financial security. Ideally, you'll want to put away 10% to 15% of your annual salary to have a decent shot at a comfortable retirement and a secure future. If other obligations (student loans, living expenses, whatever) prevent you from putting away that much right now, start with a smaller figure and increase it by a percentage point or more each year. But the sooner you can start saving 10% or more of salary each year, the more likely you'll be able to build a good six- or even seven-figure nest egg and achieve true financial security down the road.
You'll find it much easier to save -- and you'll be more likely to stick to your savings regimen -- if you simply direct a certain percentage of pay into investment accounts and force yourself to live on what's left. So if you have access to a 401(k) or similar workplace savings plan that automatically deducts savings from your paycheck, take advantage of it. And if your employer's plan offers matching contributions, as most do, contribute at least enough to take full advantage of the match. If you aren't able to participate in a 401(k) or similar arrangement, consider signing up for a mutual fund company's automatic investing plan and have money regularly transferred from your checking to your investment account. That said, if you're the type who prefers looking for specific ways to cut expenses and save money, that approach can work too.
2. Focus on investing basics, not bells and whistles. You'd never know it from listening to investment pundits, but you don't have to follow the fortunes of the thousands of publicly traded stocks or invest in every new fund or ETF variation that comes along. (Do you really need an ETF that shorts the VIX volatility index? I think not.)
You're better off keeping it simple. Specifically, for the money you're investing for long-term goals like retirement, a portfolio that contains a broad range of low-cost stock and bond index funds is pretty much all you need. And you can create such a portfolio with just three funds: a total U.S. stock market fund, a total U.S. bond market fund and, for a bit of international exposure, a total foreign stock fund. Or, if you wanted to streamline your approach even more, you could go with a target-date retirement fund, which gives you a diversified blend of domestic and international stocks and bonds in one fund and also gradually scales back your stock exposure as you age.
Whichever way you decide to go, you want to settle on a mix of stocks and bonds that can give you the long-term growth you need to build a decent retirement nest egg and provide true financial security, yet provide enough cushion from short-term market downturns so that you don't panic and sell when stock prices head south. To arrive at a reasonable mix, you can check out Vanguard's risk tolerance-asset allocation tool.
3. Be careful, very careful, when seeking help. There's no shortage of companies and financial advisers who are more than willing to provide financial guidance and advice to Millennials (and anyone else) who find the financial world daunting. The challenge is separating advisers who are competent, trustworthy and affordable from those touting investments that may not be right for you or, even worse, outright flim-flam artists.
The Department of Labor is in the midst of an effort to better protect consumers when seeking financial advice for retirement. To what extent that effort will help, if at all, remains to be seen. In the meantime, the best way to improve your odds of ending up with sound advice is to thoroughly vet any adviser you're considering working with, which you can do by asking tough questions about the adviser's credentials and demanding a detailed breakdown of fees.
You also need to focus on holding down fees. If you're a do-it-yourself investor, you can do that by limiting yourself to low-cost index funds. If you feel you need professional help to put together an investment portfolio, however, you might consider one of the new breed of robo-advisors that rely on algorithms to build and manage portfolios or a low-cost program like Vanguard's Personal Advisor Services that offers portfolio management as well as access to a human adviser. Another option is to go a la carte, or pay for advice as you need. The Garrett Financial Network has a stable of financial planners who, unlike most advisers, are willing to work for an hourly fee (typically $175 to $250 an hour).
I can't say that following the three steps I've outlined here will guarantee financial success. But doing so should at the very least improve your chances of achieving a secure future.