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Benny To is 25 years old, works in public relations and doesn’t participate in his employer’s 401(k) plan.
“My current savings account offers an interest rate that’s more than 1 percent,” he says. “I thought it would be more profitable to keep my money in a savings account than in a 401(k).”
To shares this notion about investing with many others of his generation.
A study by Broadridge Financial Solutions in conjunction with The Center for Generational Kinetics found that, on average, millennials would rather put their money in a savings account than a workplace retirement plan.
Sixty-six percent of millennials reported being confident or very confident in savings accounts. Just 58 percent, on the other hand, expressed confidence in a workplace retirement plan, a stark difference from the 72 percent of baby boomers who stated they were confident in their employers’ plan.
There are several contributing factors: distrust of fluctuating markets, a focus on short-term needs and possibly lack of educational resources.
This preference for cash over stocks may have vast implications for millennials over time as they age and approach retirement, so assessing their own risk aversion and knowing the benefits that riskier investments can, and likely will, bring is essential.
Millennials aren’t actually forgoing other investments
It’s important to remember that, while millennials say they prefer savings accounts over more risky investments, they don’t always fully act on those preferences.
A Wells Fargo report reveals that, on average, 67 percent of millennials’ assets are allocated to equities, while cash investments only account for 14 percent of the total. Similarly, while millennials did say they prefer cash in a recent Bankrate survey, their second most-desired investment is stocks.
Though he passed on his employer’s plan, To owns a Roth IRA with riskier investments. He’s just more comfortable with the consistent returns he gets with his savings account. “With my Roth IRA, the returns fluctuate, in addition to the maintenance fees I’m charged,” he says.
Still, not considering an employer plan with potentially lower fees, matching contributions and resources, young professionals can miss out when it means the most for long-term savings.
Not taking risk can be risky
By choosing cash investments over higher-earning accounts, “you’re really putting yourself at a greater disadvantage than everyone who is having their money work for them,” says Laura Morganelli, a financial advisor at Abacus Wealth Partners in Philadelphia, PA. “And younger millennials have so much time to make their money work for them. The longer you have, the more beneficial it’s going to be.”
By opening a 401(k) or other tax-advantaged account at the start of your career, especially if your employer offers a match, you’ll better positioned to reap the benefits of compound interest.
Rates of return on 401(k) plans vary by the types of funds you choose, but historical data shows a retirement portfolio split into 60 percent stocks and 40 percent bonds yields an average rate of return of 8.8 percent from 1926 to 2017, according to Vanguard. The best high-yield savings accounts and money market accounts, on the other hand, are currently paying just over 2 percent APY, though they’ve certainly paid much more than that in most of the years since 1926.
Over your career, most investment experts agree that you’d be sacrificing hundreds of thousands of dollars in interest earnings by not taking on some risk via the stock market.
Don’t put everything into one bucket
Your savings accounts are still important to your overall financial plan, but they shouldn’t be your sole focus.
Retain your savings account for your emergency fund and any other short-term goals or milestones. “I’m just saying don’t put all of your money in there,” Morganelli says. “It’s really not going to help you get to where you want to be.”
It’s important to keep goals like opening a business or purchasing a home in mind when picking your accounts. But don’t forget to look at the long-term, too. Divert your funds into different buckets so you don’t lose sight of the bigger picture.
Time is on your side
For both older millennials who experienced it firsthand and younger millennials who grew up hearing horror stories, the Great Recession impacted their financial outlook.
Fear of the unknown can make young people more risk averse at the time when taking on risk is imperative for growth. Looking at the market from a historical perspective can help. Volatile cycles tend to balance out and over time the market continues to grow.
And the economy has bounced back from 2008. “The fact that baby boomers and older generations are investing means that they’ve gone through it and they’ve come out the other side,” Morganelli says. “Risk is just a part of the process.”
While savings accounts have their own benefits, you shouldn’t be afraid of or apathetic towards tax-advantaged retirement accounts that can earn you more over your lifetime. Education is key. Look to online resources, consult a financial planner and even talk about it with your friends and family.
As for To, he’s open to exploring his options. Though he was initially wary of opening the Roth IRA and his priorities still lie in savings and paying off student debt, he says he is open to looking into different retirement accounts in the future.