The FINANCIAL — The Greatest Generation had the Great Depression. The generation that came of age during the turbulent 1960s faced debilitating stagflation and malaise.
And today's young adults, like their parents and grandparents, are encountering their own considerable economic hurdles. They, too, have lived through a harsh downturn, and they started investing — or not — during a historically bad stretch of stock market history. In many cases, they've emerged from college with significant debt and uncertain job prospects. They've also seen their parents experience a phasing out of corporate pensions, longer life spans, and rising health care costs, causing them to rethink traditional notions of retirement.
According to the latest Merrill Lynch Affluent Insights Survey, released in August, young people have serious financial concerns. In the survey, 78% of people in the 18-to-34 age group said that today's economy affects their ability to meet financial goals. Sixty-one percent said they are uncomfortable with how much money they owe. And retirement, though far in the future, is already on their minds, with 94% saying they are anxious about the possibility of outliving their assets, while three out of four wonder whether they'll be able to afford the lifestyle they hope to have once they stop working.
Yet despite these new hurdles, young people today have real advantages compared with generations past when it comes to dealing with economic adversity. They're effortlessly savvy with technology and social networking, leading the way in an information revolution that is transforming not just their world but the broader culture as well. This generation is well-educated and self-confident, with a team orientation — and it will continue building on these strengths, according to Anya Kamenetz, author of Generation Debt and DIY U and staff writer at Fast Company. "As much as young people are concerned about their future, they really believe this world is theirs to shape, and that they're in charge of their attitudes and their expectations," she says.
Whether they're equally in charge of their finances is another matter — at least if you ask their parents, who appear to have real worries about how ready their sons and daughters are for financial independence. According to the Merrill Lynch survey, almost a third lack confidence in the ability of their adult children to manage their own money. When asked what was the most important wisdom they might impart to their children, 48% of affluent parents in the survey mentioned "financial know-how" — much more crucial, in their view, than choosing the right spouse, partner or career.
Young adults, as they begin to break away from their parents economically, need that know-how — specifically, to learn how to save and invest, and to adapt to sea changes that demographic shifts have set in motion. Retirement, in particular, is likely to be very different 40 years from now, if it even exists at all in the traditional sense.
But by starting early and working steadily toward goals that make sense for them, this generation, too, can put itself in a position to achieve its most ambitious personal and financial goals.In many ways, Elise Spadavecchio, who graduated from the University of Michigan in 2007, is typical of people her age. Armed with a degree but lacking professional experience, she decided to move back home to save on expenses while working at low-paid internships and building her résumé. While not a choice most baby boomers would have made 30 or 40 years ago, it's common among today's young people as a way to cut costs and wait out a slow employment market. It worked for Spadavecchio, eventually helping her land a good job with a large international advertising and public relations agency.
So far, though, that hasn't happened, in part because of what those in their twenties and thirties have experienced to date. "For the past 10 years, this generation has watched a stock market that didn't go anywhere, and now in their own job searches, young people are experiencing considerable volatility in the markets as a result of high unemployment," says Christopher Wolfe, chief investment officer for the Private Banking and Investment Group at Merrill Lynch Wealth Management. "If they're living independently for the first time and earning an entry-level salary, they may be spending so much of their disposable income that they can't save right now, even if they want to. For them, paying down credit-card debt at 15% interest is a better bet than investing that money in the stock market."
Yet it's important that they do both — paying what they owe while also setting something aside for the future. "If people have lots of debt, they may have to save less initially," says Pelletier, who compares the habit of putting money aside with a muscle that has to be strengthened through exercise. "Even if they can just save 1% or 2% of their salary, that can get them started, and then every time they get a raise they can allocate a quarter or half of it to their savings." Wolfe suggests using part of even the smallest savings budget to build an emergency fund that can be tapped during career interruptions.
One inducement for investing your savings, even when it's difficult, is that an early start gives your money time to compound. Pelletier drives this point home in the personal finance seminars he teaches to college students, making sure that everyone understands the potential benefits of the rule of 72. "It's very simple," Pelletier says. "Start with the rate of return expected on the investments. Then divide that number into 72. That's how many years it takes to double the amount."
It's impossible, of course, to know what kinds of returns an investor will earn over the long term. But at a 7% rate of return, for example — a figure that stock-heavy portfolios have achieved in the past over long periods, though there is no guarantee this would happen in the future — it will take about 10 years. At 3.5%, it will take about 20. "Theoretically, with the rule of 72, a 22-year-old who sets aside $10,000 for 50 years, with that money earning an average of 7%, will accumulate some $320,000 — without saving another dime," says Pelletier.What's essential, for many in this generation, is having the freedom to live according to their own priorities. Retirement is often a foreign concept.
Many young people, Spadavecchio among them, assume they will be working until they're 80 or older, provided they're enjoying themselves and can capitalize on the good health they expect to have. But that doesn't mean they'll be constantly employed for 50 or 60 years. "If you talk about young people and their careers and their retirement in traditional terms, you're really doing them a disservice," says Andrew Sieg, head of Retirement Services at Bank of America Merrill Lynch. "They have so many more choices today that they can make. ‘When will I get married? When do I want to work, and when do I want to be out of the workforce?'" And if career interruptions are likely — for instance, with dual-income couples deciding to start families later — technology will continue to develop that makes it easy to work part-time or without regard for geography.
Of course, at the moment, finding a job in the first place remains something of a challenge. Yet the unemployment situation ought to improve over time, in part because the previous generation continues to retire at a prodigious clip.A career path driven by personal preferences and entrepreneurial impulses requires a different kind of preparation. Human capital — a personal asset consisting of education, intellectual abilities and marketable skills — becomes an invaluable currency. "Young people need to invest in themselves — taking classes or going to graduate school to keep their skills relevant for second, third and fourth acts over several decades," says Sieg. Pelletier concurs: "The more knowledge and skills people have, the more opportunities they'll have to choose among."
But amassing a portfolio of marketable skills also takes the other kind of currency — which means that as their careers progress, today's young people will need to have money available to fund an ongoing investment in their own human capital.
In that regard, many in this generation are off to a slow start. Only half of all employed young people contribute to a 401, and their average savings rate is just 5.3% of their pay, according to a 2010 report by the human resources and outsourcing company Aon Hewitt. The report analyzed 401 data from nearly 3 million participants. It also found that 41% of young workers are forgoing matching contributions from their companies because they don't put in enough of their own income, and some six in 10 cash out their retirement accounts when they change jobs. Others, like Spadavecchio, have never needed convincing about the importance of setting aside money with an eye to the future. She makes regular contributions to a 401 at work and also has money automatically deposited into a savings account each month. "If the cash isn't in my checking account, I know I won't spend it," says Spadavecchio, who uses those savings to make annual contributions to her IRA.
But being scrupulous about saving and investing doesn't necessarily mean that a person immediately knows how best to deploy the cash they've accumulated in their retirement accounts. In Spadavecchio's case, it took the help of Financial Advisor Bernie Allen to persuade her to look beyond the safest investment options. "Before I started working with Bernie last year, I didn't want to invest in the market because I was afraid of losing my money," she recalls, noting that her reluctance was reinforced by the example of her mother, an avid saver whom Spadavecchio describes as "very risk-averse."
That term could also describe many young investors — though their wariness of financial markets has eased. Whereas in 2010, more than half of those aged 18 to 34 described themselves as conservative investors in the Affluent Insights Survey, only 24% now say they fit that category — a change mirrored by Spadavecchio's shift in attitude: "My entire IRA was invested in CDs, but I was almost losing money because the interest rates were so low."
She gradually came around to the idea that adding some stocks to her accounts could help over the long haul, and Allen was able to show her that the investment risk of equities, spread out over the decades of an investing life, may not be as great as she imagined. Then, in a bit of reverse generational teaching, Spadavecchio repeated some of these conversations to her mother — who is now working with Allen and beginning to venture into the stock market.
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