Q & A with DAVID ROSELL of Rosell Wealth Mangement
How do millennials view investment risk? Are they more risk-averse than others? In all likelihood, your parents and/or grandparents had a financial plan, probably a really good plan. But $hit happens; 2008 is proof of that. Good people—maybe your own parents, who had worked hard and accomplished much—lost homes and retirement accounts. Many retirees, maybe your grandparents, were forced to return to work.
I try to imagine what it must have been like to start your career during this ominous time. Like most new graduates, you probably felt that the possibilities were endless when you got out of college. It likely did not take long to become totally disenfranchised.
What factors influence millennial attitudes toward risk? The Great Recession? Others?
It has been said that timing is everything. If you are a millennial who just happened to be graduating from college and looking to start your career in the depths of the Great Recession, you were most likely knocked flat on your back before you even had a solid footing. Talk about being cursed with unfortunate career timing. That had to be a serious shock to you and your entire graduating class. These experiences during such impressionable years have led many millennials to take an emotionally driven approach to financial planning and to adopt conservative money habits that many compare to the investment behavior of young adults during the Great Depression.
Nothing could have prepared you graduates for the economic sledgehammer that followed the collapse of the world’s stock and housing market, which began in December 2007 and ended in June 2009. The financial markets were under siege and no one in their wildest dreams could have ever imagined that the world’s largest mortgage company, insurance company, stock brokerage firm, investment bank and savings and loans would have all declared bankruptcy or no longer exist. I would have thought you were delirious if you had told me this was possible before the impossible became a reality. For crying out loud, even the world’s largest automaker—GM—went bankrupt. It wasn’t the only company that got thrashed. Chrysler, previously one of the big three U.S. automakers, is now owned by the Italians.
A couple of years after I graduated from college, I moved out of my
I remember when my dad called me into his home office and told me it was time for me to assume the payments for my health insurance.
“You’re no longer part of our plan,” he said. “So this is on you now.”
“What do you mean health insurance is on me?” I exclaimed.
This expensive endeavor of setting out on my own had just become even pricier. I didn’t love the reality check, but I was determined to remain independent. So I sucked it up and found a way to cover my health insurance payments along with everything else.
Who would have ever imagined that Wall Street’s lack of scruples could so directly impact us? Many economists believe that you millennials are a generation whose daunting experiences will beleaguer you for the rest of your working lives. I believe by gaining knowledge of the sound financial principles contained in this book—along with learning how to keep your emotions at bay and not be immobilized by fear (my least favorite word)—you will become the generation that pushes the economy forward.
Still, I get how easy it would be after such an experience to hide money under your mattress, never buy a house—or buy the world’s smallest one, if you subscribe to the idea of the tiny house movement. It’s all about your perspective.
How do these attitudes show in millennial investment strategies? Focus on cash and secure investments? Avoid or limit equity exposure?
Every generation has had its own set of trials and adversities to conquer. However, today’s generation of young adults faces a uniquely challenging environment. In the past, if you emulated the admirable examples of your parents and grandparents as they prepared for their years of retirement, your chance of achieving success was very high.
Similarly, if you followed the step-by-step advice of the many how-to books on retirement, your chances of success were also quite strong. So far, the 21st century has turned much of the traditional wisdom regarding financial planning upside down simply because the rules of engagement have been
Gone are the days of pensions and defined benefit plans. Social Security has become Social Insecurity. Student loans are now the second largest debt class, behind only mortgages. And saving for retirement is a luxury that many just can’t afford. Launching into adulthood is never an easy task, but you millennials have it pretty rough—at least compared with recent generations. But don’t give up. There’s hope.
Through a combination of travel stories and prudent financial and life lessons, Keep Climbing: A Millennial’s Guide to Financial Planning will provide you with the financial foundation that’s critical to financial success. Unfortunately, I can’t guarantee or even assure you that the financial coaching contained in this book will enable you to reach your lifestyle and retirement dreams in today’s new-fangled world. What I can pledge is that if you don’t learn, understand and implement the concepts within, your chances of reaching your monetary goals—or even being able to retire and cash in your fun coupons—are likely to shrink to the point where you could very well find yourself in the financial
What implications are there for millennial risk attitudes? More difficult to achieve investment growth and retirement planning goals?
Many investors who do not feel confident in their ability to invest intelligently seem to steer clear of risk completely. At least that’s the intent. So they place their money in what they consider safe investments. These often include CDs, the money market or other guaranteed savings options.
The predicament is that these investments usually do not keep pace with the inflation rate that averages between 3 and 4 percent each year. While they may see their account value increase slightly on an annual basis, they are actually losing purchasing power. One guideline I have heard over the years is to subtract your age from 110. The answer you get is the percentage of money you may want to allocate to stocks. For example, if you are 35 years old, then 75 percent of your portfolio should be invested into stocks (110 – 35 = 75).
What can millennials do to achieve their investment goals? Save
Don’t leave money on the table:
According to a recent study conducted by the Financial Industries Regulatory Authority (FINRA), almost 30 percent of American workers do not contribute enough to their 401(k) retirement plans to receive their employer’s matching contribution. It is estimated that every year, billions of investment dollars are left on the table by employees who just don’t take advantage of this no-brainer action. Let me remind you.
It is typical for employers to match dollar for dollar the first 3 percent or more of their employees’ income in 401(k) retirement plans. If your employer offers such a program and you’re not already taking full advantage of it, you are basically throwing away free money. For example, if you earn $50,000 per year before taxes, your employer will match the first $1,500 (3 percent of $50,000) that you contribute to your retirement plan. By the end of the year, you will have accumulated $3,000 for your financial future. This is made up of the $1,500 you had deducted from your paycheck along with the free match of $1,500 that your employer contributed into your account. This does not even factor in any potential gains your account may have received for the year. There is nowhere else I have ever seen where you can get a 100 percent rate of return. Guaranteed! That’s $1,500 of free money. Why would you turn down free money?
If you were to contribute $1,500 per year, your actual out-of-pocket cost wouldn’t even be that amount. Here’s why. Any money you contribute to a 401(k) reduces your taxable income. If you’re earning $50,000 and you’re a single filer, you’re in the 25 percent tax bracket. That means your taxable income will be reduced by $1,500 and you would save $375 ($1,500 x 25 percent = $375) in taxes, so your actual out-of-pocket investment cost is $1,125, or $94 per month.
When you sign up to contribute to the retirement plan your company offers, your employer will usually systematically deduct the amount you request from each paycheck. I call this paying yourself first. After a month or two, you will barely notice the difference in your paychecks. However, you’ll be amazed how such an ordinary task will yield such extraordinary results for you over time. As the years pass, you’ll have socked away a considerable sum for your financial future.
2. Increase Your Savings When Your Income Increases
Just because you started to save for your financial future by simply enrolling in a 401(k) doesn’t necessarily mean you are saving enough. But that’s an easy thing to ignore. All too often, when people receive a 5 percent raise, they increase their standard of living by 7 percent rather than maintaining their level of comfort and increasing their 401(k) or IRA contributions. If your goal is to replace a similar portion of your current income during your years of retirement, it’s important that you increase the amount you put aside based on the amount you earn. So celebrate your next raise and all the raises that follow by increasing your retirement account contributions each time. Don’t walk away from this incomparable opportunity to begin or increase funding your company’s 401(k) or whatever retirement plan they offer.
3. The Biggest Mistake of All: Doing Nothing or Waiting Too Long to Start
I do not want to disparage the pressure so many millennials are currently experiencing with student loan debts that average almost $30,000. If that sounds like the mountain you have to climb, you’re not alone. U.S. News & World Report states an estimated 40 million Americans carry student loans and about 70 percent of today’s students graduate college with debt.
With these statistics, it’s no surprise that saving for your future often takes a back seat. In addition, millennials are an underemployed generation, which makes the situation even more hair-raising. I know it’s incredibly challenging, but I am here to both share a blinding flash of the obvious and try to motivate you to keep telling yourself, The tougher you are on yourself today, the easier life will be on you later!
We were all born to procrastinate. That’s why there are deadlines and extensions. Unfortunately, deadlines and extensions don’t exist when it comes to your financial future. It’s happening right now.
It’s so discouraging that most people spend more time planning their adventurous getaways than they do their finances—and by now you know how much I love my adventures. If you spend more time planning your finances now, you will have a great many more vacations and overseas adventures to plan in your future. Does that sound appealing? Now is the time to take charge of your finances! To add a little humor to a serious topic, it’s been said that doing nothing is hard because you just never know when you’re done. And that’s no way to live a life.
So, start saving as early as you can. The most important asset you have when saving for retirement is time. The earlier you start saving, the easier it will be to achieve your financial goals. Here’s another startling fact to help motivate you: Every six years you wait to get started doubles the required monthly savings necessary to reach the same level of retirement income. As fellow author and speaker Michael Hyatt says: When would NOW be a good time to do it?
David Rosell is president of Rosell Wealth Management in Bend. He is the author of Failure is Not an Option- Creating Certainty in the Uncertainty of Retirement. You may learn more about his book at www.DavidRosell.com or Amazon.com. Ask for David’s book at Costco, Barnes & Noble and in Bend at Newport Market, Cafe Sintra, Bluebird Coffee Shop and Powell’s Books in Portland.