The uncertainty around the COVID-19 pandemic has highlighted the importance of saving. Americans are saving at unprecedented rates. According to the Bureau of Economic Analysis, the average saving rate of 7.6% in 2019 jumped to 33.7% in April 2020 and moved to 13.6% in October, still higher than average. Cash savings are a great habit that will contribute to an individual’s long-term financial health and reduce anxiety around uncertain events. Unfortunately, the interest on cash savings is at historically low rates and will remain low for the foreseeable future.
In addition to setting aside money emergencies, millennials can put money into investment vehicles. Many of these can be the best way to grow earnings and financially prepare for retirement and other future events. Millennials, unlike older investors, generally are able to take more risk as they have a longer timeframe to recover from losses before they retire.
First step in preparing for retirement, is to look at paying off any high interest debt. For example, if you are making 10% returns with investments in the stock market but paying off a 15% interest rate on a credit card, it makes more sense to pay off the credit card first. Certain lower-cost debts, however, can be paid off while you start investing. Student loans, in another example, have average rates of 2.75% for undergraduate borrowers and 4.3% for graduate borrowers, so it might make sense to invest while simultaneously paying off these loans.
Once investing begins, it is important to think about diversifying assets. Thankfully, there are more attractive opportunities for entry-level investors than ever before. Employer-sponsored retirement plans such as 401(k)s and 403(b)s are an excellent way to begin saving for retirement. Many employers offer to match funds up to a certain percentage of employee contributions. It is often a good idea to contribute enough to take full advantage of an employer’s match. Beyond that, consider putting additional money elsewhere. Individual Retirement Accounts (IRAs) are also a great vehicle for saving for retirement. Roth IRAs are typically more attractive to younger people because your contributions have already been taxed, and most people are in a lower tax bracket now than they will be at the time of retirement. There are, limits however, on how much one can contribute and income ceilings on who can contribute to a Roth.
Owning index funds, which mirror large sections of the stock market, is another good option for early investors to start, rather than investing in individual stocks. Indexed funds are invested in a variety of different stocks from many companies, which will ensure you have a diverse portfolio. Diversification adds some protection and can be low cost, as compared to buying individual stocks. The volatility of stocks can be offset by complementing your stock investments with bonds investments, which typically are more stable, but currently offer lower gains. According to a study by Vanguard, an investment portfolio evenly divided with stocks and bonds would have lost nearly 29% of its value during The Great Recession but would have bounced back a year later. A portfolio that was entirely in stocks would have lost 55% of its value and taken three years to recover. It is important to find the right stock-bond investment mix that aligns with your goals. Target-date funds can be a great choice for deciding your stock-bond allocation because they are designed based on the year you want to retire. As the date approaches, the investment allocation automatically shifts to become more conservative. Investing as early and as often as possible allows you to maximize potential growth, as well as prepare for your future.
It is always best when considering where and how much to allocate to investing, to consult with a trusted advisor who can help you build a plan that suits your individual goals and plans for the future.
Sources:
https://www.nytimes.com/2020/11/27/business/millennials-retirement-saving.html?searchResultPosition=11
https://www.nytimes.com/2020/02/10/smarter-living/the-young-persons-guide-to-investing.html?action=click&module=RelatedLinks&pgtype=Article
For Educational Purposes Only – Not to be relied upon as financial advice. Investing involves risk, including loss of value. Diversification cannot assure a profit or protect against a loss in a down market. The principal value of “Target” funds is not guaranteed at any time, including at or after the target date
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