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If I Had A Million Dollars, I’d . . .

50995412 - senior business man using a laptop building online business making money dollar bills cash falling down. money rain. it entrepreneur online job success economy conceptI was outside the other night cooking supper on the grill, having a glass of wine and listening to the radio. On came that famous song from a couple of decades ago, “If I Had a Million Dollars . . .” You remember the one; it’s from the Barenaked Ladies and is about all of the things a guy would buy for his gal if he had a million bucks. The list includes a house, a K-car (I learned to drive on one), a fur coat, a monkey, and more, before saying he would ultimately buy her love.
 
I began to chuckle because it reminded me of a new study by Prudential that I read just the day before. As I thought about the study, I couldn’t help but sing, “If I had a million dollars, I’d buy you a comfortable retirement.” Not as fun as a driving my mother’s red Reliant K-car, I know.
 
Prudential studied Americans in their 20s and early 30s. This demographic expects to retire at age 67. According to the study, they will require about a million bucks to afford the retirement they want. But, there is a startling disconnect between the amount of money those millennials will need and the amount of money they will actually have, based on their current financial behaviors.
 
When reading the study, I was astonished to find that more than 40 percent of millennials admit they haven’t even begun to save for retirement. The study listed many reasons as to why this is the case, and in my opinion many of them hold water. One legitimate reason provided is that student loan debt is a crippling reality that is holding back many college grads in their financial planning. Think about it: the average student is coming out of college with more than $35,000 in student loans. Unfortunately, we often see kids coming out with even more student debt, sometimes more than $100,000! Folks, the monthly payment for that much debt is a mortgage payment for the rest of us. Having such a substantial monthly loan payment often holds our kids back from moving on with their lives.
 
This leads to a generation that is getting married at a much later age than past generations. Marriage allows people to split expenses, often with dual incomes. But without this advantage that comes with marriage, young adults are finding that they don’t have the financial stability that past generations enjoyed.
 
These young folks are also old enough to understand the pain and anguish that their parents and grandparents have experienced in the markets since 2000. They remember 2001, 2002 and the catastrophic 2008, where many of their families lost over 50 percent. These past experiences tend to make this younger generation investment weary and risk adverse. In fact, according to another study, published by Accenture, 43 percent of millennials described themselves as “conservative” when it comes to investing, while just 31 percent of baby boomers consider themselves conservative with their investments.
 
Hmm.
 
Look, I get it. I really do. I have three kids and I often think of the challenges they may face that I did not. But, hitting that million-dollar mark isn’t a pipe dream; it really isn’t. It must start with a foundation built from a desire to build for the future, the discipline to stick to a plan and a determination to make the necessary sacrifices.
 
These kids must have a “no excuses” attitude and it starts with you and me; as parents, grandparents, aunts, uncles, whoever can sound the bells to help teach millennials to start getting realistic about their investment behaviors and attitudes. While all these kids come from different challenges and circumstances, there is one common denominator they all share—time. With more than 30 years before retirement, that time offers a lot of room for growth. And, another often overlooked upside to that time horizon is recovery. Young investors have more time to recover from a loss, so they are able to take on, and should take on, more risk.
 
If someone five to 10 years from retirement loses 40 percent of his or her portfolio, like many did between 2001 and 2010, he or she probably does not have enough time to let that grow back before needing to withdraw from it. On the other hand, if someone 25 years from retiring loses 40 percent, he or she may have decades before ever having to touch that money, providing a longer runway to recover. Another benefit to that longer time frame is the benefit of dollar cost averaging. Dollar cost averaging is what we do in our accumulation years. The premise of dollar cost averaging is that by consistently contributing to investments, an investor buys more shares when the markets are compressed and less when they are not. Someone already in retirement usually is not still accumulating wealth and therefore does not have that benefit.
 
One solution found in many 401(K)s that may help those risk-adverse young investors are target date funds. Now, I am not a big proponent of these buy and hold instruments and would not use them outside of an employer-sponsored plan where options are limited; but for that young demographic, they may provide a solution to help them start building their portfolio to create a successful retirement. Those target date funds allow an investor to select a time horizon before retirement, and automatically adjusts the risk to appropriate levels based on that time horizon. These funds are built more heavily upon stocks early in the investor’s career and then gradually shift to a more conservative profile as the investor ages and nears retirement.
 
Overall, younger folks need to have a more equity-laden portfolio. The 60/40 split is a common equity/bond ratio for older investors. The equity exposure for millennials, should be closer to 80 percent, or even higher. Equities have historically outperformed bonds and have generated stronger returns over a rolling 30-year period. Historically, the average equity return is double that of the average bond return.
 
Years ago, that million-dollar mark sounded like an incredibly high figure that led to a lavish lifestyle. But in 30 years, million dollar retirement funds will have to become the norm for millennials. Let’s hope they don’t spend their million bucks on monkeys and K-cars!
 
Together, we need to teach these folks to be vigilant and to stay alert; they do deserve more.