Millennials and Savings: Is Starting Early Savvy, or Just Necessary?
A recent article published in the Financial Post on July 22, suggests that Millennials are saving at a much younger age than other generations. While the article correctly identifies that Millennials face financial pressures not experienced by other generations, including higher tuition costs, student debts, fewer jobs, and higher housing prices; unfortunately it includes a few problems in assessing the financial position of the generation.
The first important issue to address is that of the research study referenced in the article. A poll is cited to provide insight into the attitudes and behaviours of Millennials and Boomers when it comes to saving and investing. However, the poll only included a sample of 150 Millennial respondents, and no further methodological data is provided (was it conducted online, by telephone, etcetera). Such a small sample size can introduce dangerously large margins of error into the data, making it extremely difficult to reach meaningful conclusions. In survey research, it is almost never a good idea to draw conclusions on a sample population of less than 500.
A more troubling portion of the article emerges through a series of quotes from a vice-president at TD Wealth Private Investment Advice. According to the interviewee, “if someone invested $100 per week, in 10 years she’d have $65,551, assuming a 6% rate of return – she could have a down payment for a home”. Although this is a classic example of compound interest given by financial planners, such a savings scenario is simply unrealistic for many people, not just Millennials.
Although there’s no one ‘right’ answer on how much to invest or save, many investment resources will suggest a starting point of 10% of your pay – this of course depends on whether the source is using a net pay (after taxes), or a gross pay (before taxes).
The table below highlights average before-tax income drawn from the 2008 census. Millennials were born between 1980 and 2000, so note that the oldest Millennials would have been 28 in 2008. Using these average figures, it becomes clear that saving $100 per week ($5,200 per year) could be very difficult, if not impossible, for the average Millennial.
Moreover, the quotes in the article suggest an average return of 6% on that investment. Currently, many guaranteed investments pay 2% or less annually, with extremely low risk investments like the Canada 10-year bond yielding nearly 2.5%. Even with much riskier mutual funds it would be difficult to realize a net return of 6%.
Another critical aspect of Millennials and saving not addressed in the article is the prospect of debt. Many young people carry student loans, credit cards, or even debt to other family members. According to a May 2013 article published online by The Globe and Mail, although 40% of Millennials carry no student debt, the average amount for the 60% who do is approximately $25,000 (which, assuming a 4% interest rate, would require a payment of approximately $260 per month to pay off within 10 years).
Managing debt is at least as important as building an investment portfolio. There are a number of different approaches to dealing with debt and savings: some advocate paying down the oldest debt first, some the highest interest rate first and some the smallest debt first. There is no universal solution to savings and debt – it is almost always worth talking to an expert to come up with a plan best suited to individual needs and goals. That said, many financial planners would recommend aggressively paying down high-interest debt while not completely ignoring savings.
An early start to savings is good, but the article misses a critical point – how much are Millennials actually saving. While insights provided by the interviewee present a hint at a hypothetical portfolio, they do little to show what amounts are actually being saved.
It shouldn’t be taken as a surprise that Millennials have started saving earlier – extremely low interest rates, increasing real estate prices, a decrease in employer-funded pensions, and high levels of student debt have all but forced Gen-Y into such a position. Parents encouraging their children to save realize the implications of the current landscape as well.
So how can Millennials start saving in a way that works? Starting early is great, even just to build a habit; but it’s important to be realistic about what’s affordable to save. Another article I recently posted here on the Abacus Insider provides a discussion of budgeting for Millennials and some ideas about how to save, but, as mentioned earlier, the best way is to seek advice from a professional you feel comfortable with. It’s also important to keep in mind that with the added debt burdens many Millennials face, and longer projected lifespans than ever before, it could be that starting to save early is not such a savvy move, but a necessary one.