Millennial investors — those between the ages of 18 and 38 — have time on their side when it comes to financial planning. Still, this group faces unique challenges that may be managed with early planning and some expert advice.
With $1.4 trillion in student debt, housing prices near all-time highs, and many companies shifting the responsibility of retirement savings to their employees, Millennials face a different set of challenges than previous generations.
According to advisors working with Millennial clients, the top financial goals include:
1. Managing student loan debt
2. Building a retirement nest egg
3. Saving for a home
A comprehensive plan
Helping investors organize goals is a first step. As part of a comprehensive plan, Millennials should consider dividing their savings into:
- An emergency fund, with enough savings to pay 6-12 months of necessary living expenses
- Debt repayment fund, where investors can set aside money to meet minimum debt payments each month
- Home fund
- Retirement fund
Address student loan debt
Investors should set goals and implement a plan to pay off loans. Initially, money needs to be set aside each month to meet student loan minimums.
- When receiving extra cash gifts or promotions, allocate additional funds to accelerate principal payments. This can help pay off debt quicker and potentially improve your credit score.
- Consolidate or refinance student loans
- Take a job that makes them eligible for loan forgiveness. Certain professions such as teacher, nurse, lawyer, or public sector employee, may offer loan assistance.
- Explore potential tax deductions for student loan interest
Build a retirement nest egg
Getting professional advice early can help investors optimize their retirement savings if they have access to a workplace plan like a 401(k). Investors need to make sure they are taking the appropriate level of risk based on their investment time horizon. Depending on income level, investors may want to consider saving at least a portion of their deferral in a Roth IRA/401(k).
It is critical to understand an employer’s retirement plan. Here are some questions to address with plan administrators:
- How does the employer match work?
- What is vesting and how does it work in the plan?
- How can employees get more information on plan investment offerings, and which options may be appropriate for my needs?
- Does the plan offer Roth contributions?
- How can employees withdraw funds penaltyfree?
If investors commit to automatic savings, whether through auto-enrollment in a workplace plan or on their own, they are more likely to meet their savings goals. Those without access to a workplace plan may consider systematic investments into an individual retirement account (IRA) from a bank.
Save for a home
Review options for assistance before setting a savings goal. There are several government programs, through agencies like Federal Housing Administration, Housing and Urban Development, or the Veterans Administration, that can help savers accumulate a down payment.
A first step is to assess affordability. A calculation of PITI (principal + interest + taxes + insurance) is often helpful. Lenders will look at certain ratios such as PITI to income in order to determine mortgage eligibility (a maximum of 28%, depending on certain factors is a good rule of thumb). Also, a financial advisor can help first-time buyers understand how mortgages work, including mortgage points, variable versus fixed options, and private mortgage insurance (PMI).
The opportunity for advice
Today there are some 75 million Millennials in the United States. Among them about 15 million have more than $100,000 in investable assets. Many seek advice from family or friends. Others are more focused on do-it-yourself strategies and apps. A recent study found the majority of Millennials are saving for retirement, home purchases, and other goals, but nearly 70% acknowledged they are not currently working with an advisor. Still, many surveyed indicated they are open to advice and 55% said they would consider using their parents’ financial advisor.
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