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The Surprising Reason Millenials Aren’t Building Wealth as Fast as We Should Be

Gen Y has a tough road to saving for a secure retirement thanks to massive student loans and a tight job market. But there’s another problem that most people aren’t talking about. Learn what it is and what you must do about it.

Why are Millennials behind on retirement planning? Student loans play a part, but there't another surprising reason.When it comes to figuring out the financial needs of the so-called “Generation Y or Millenials, you have to take a step back and consider what good age labels are in the first place. Are all Baby Boomers narcissistic, nostalgic and selfish? Are all members of Generation X caught in a dystopian nightmare of dead-end jobs and endless therapy sessions? Sooner or later, the stereotypes must break down.

True, I have as much fun lampooning the Boomers as anyone else. (It’s my theory that for every ’60s TV show made into a cheesy Hollywood film, there’s a Boomer movie exec who can’t let go of his childhood, cheering the idea.) But if you want to get a clear picture of the values and questions that drive any generation, you have to get out into the field, talk to real people, and collect hard data.

43 percent of Millennials ill-informed about investing for the future

That’s what the folks at TIAA-CREF did recently with their Financial Advice Survey, released late in 2013. TIAA-CREF is a national financial services and mutual fund organization with $542 billion in assets under management as of October 2013. They provide retirement services in the academic, research, medical and cultural fields. As part of their survey, they talked to 1,000 adults aged 18-64 about their attitudes toward and preparation for retirement. About a quarter (28 percent) represented the 18-34 demographic.

Among all age groups, Gen Y is the most likely to say that it’s “a little or not at all informed” about retirement planning. By itself, that’s not surprising: An 18-year old is a lot further from their retirement years than someone in the 55+ age bracket.

Still, it is concerning to learn that the 43 percent of Gen Y adults who answered that way equals the percentage for all other adult age groups combined. When you jump to the 35-44 age split, only 15 percent say they are relatively uninformed about retirement planning; ditto for those 45-54, with only 13 percent answering that way in the 55-64 age group.

The unsurprising reason? Student loans

One reason for this, the survey suggests, is that those in Gen Y have a much bigger financial bear to wrestle: student loans. Among those ages 18-34, 35 percent say they’re focused on managing student loans, a number that’s just a pinch below the total percentage for the next two age groups (36 percent for ages 35-44 and 45-54).

Those numbers are a cause for concern among TIAA-CREF staffers such as Amy Podzius, a financial consultant there. “For every 10 years you delay saving, you’ll need to save three times as much to catch up,” Podzius says. “If you contribute $1,000 per year into an IRA every year from age 20 to age 30, and contribute no more, at a 7 percent average annual return, your account will be worth $168,515 at age 65. Starting at age 30, you would need to contribute $1,000 per year for 35 years at the same average return to reach an account value of $147,914 at age 65.”

There’s a ray of light, though, insofar as how teachable those in Gen Y happen to be. Gen Y is most interested in interacting with an advisor online (61 percent), as well as attending webinars (59 percent) and live seminars (58 percent)—those percentages outrank numbers in older age groups.

The red flag: Millennials do not trust financial advice

Yet even though Gen Y is more open to financial technology, younger investors are more cautious about whom they trust. Seven of 10 in Gen Y seeking financial advice will rely on friends and family, while Gen X advice-seekers rely more on financial advisors, advice websites or online tools (55 percent).

We don’t know why Millennials are more wary of financial advice, but we can guess it has something to do with coming of age during the worst recession in 50 years. Seeing our parents lose a third of their savings to stock market and real estate crashes doesn’t inspire much confidence.

Of course, the people at TIAA-CREF want to see those numbers change. The organization stresses that it offers online budgeting and savings calculators to help young adults reach their financial goals. TIAA-CREF also has an iPhone App that provides tracks investments, projects different retirement scenarios, and calculates the benefits of cutting specific expenses. (Fun fact: An ice cream treat eaten five times a month, costing $6.50, will deprive you of about $16,000 in retirement income in 30 years, given a very modest 2 percent interest rate.)

Yet as someone who’d rather tap friends and family over suits and ties myself, it seems to me that maybe TIAA-CREF and others have to step up their game with Gen Y outreach. That’s not to say TIAA-CREF isn’t a great organization. Compare the stories of unmitigated greed and consumer contempt coming from Bank of America, Chase and AIG with the track record of TIAA-CREF, which has offered personalized retirement plan financial advice since 2005 at no added cost to clients of all income brackets and life stages.

The issue here, I think, involves a very proactive effort to find and mentor young adults: to help them understand the power of compound interest, the wisdom of early retirement planning (even at just $50 a month), and the amazing payoff that’s in store once good habits are adapted and great professionals consulted.

To that end, it seems TIAA-CREF gets the message. It says at the end of its Financial Advice Survey that it’s adding 100 advisors to its team, and that it has grown the total number of advisors by more than 50 percent since the start of 2012. That’s indicative of a commitment. They have a new Website devoted to starting out your financial life, to which Money Under 30 founder David Weliver contributes.

Can we restore the trust?

But is it enough? Ask any of your Gen Y peers and they will tell you that they’re used to people trying to sell them something, anything, from their toddler years onward. They’re smart. They read the online news reports and know that the financial trail leading from the Great Recession to today is littered with the detritus of broken promises—of numbers twisted to suit the purposes of greedy CEOs. They’ve seen financial chicanery promulgated by MBAs and such whose only guiding ethical principle is “Don’t get caught.”

Gen Y grew up in the shadow of Enron. Of Arthur Andersen. Of AIG. Of “The Wolf of Wall Street.” Of Bernie Madoff and his shocking ponzi scheme. Of toxic mortgages and broken pension plans. If they don’t trust the advice of well-meaning members of the financial community, or reach out to those folks, it’s because the financial community as a whole has been found wanting, in case after case after case. Put yourself in the shoes of Gen Y and ask yourself: How on Earth should they know who’s trustworthy and who’s not? 

Yet there is good news, and it comes in the form of good people. And so to the good people at TIAA-CREF and elsewhere: If you truly want to help the members of Gen Y, take the next big step beyond taking their pulse in a survey. Reach out to them (or comparable financial professionals) — don’t wait for them to come to you—and make every effort to earn their trust … for trust can only be earned over time, by repeated shows of integrity and honesty.

What do you think? What makes a person in the financial community trustworthy to you? And what sets off your alarm bells, or keeps you from calling an expert for advice? Trusting an investment company? I’d love to hear your answers and perhaps use them as the basis of a future column. Leave a comment below or email at feedbacker@aol.com.

I began by stating it does good to take a step back from the labels, that sooner or later the stereotypes must break down. Talking about our financial problems and challenges, and the finding a way forward, makes for a great start.

About Lou Carlozo

Based in Chicago, Lou Carlozo is a personal finance contributor for Reuters Money, a columnist with DealNews.com, and a former managing editor at AOL's WalletPop.com. Contact him with story ideas for Money Under 30 at feedbacker@aol.com, or follow him via LinkedIn and Twitter (@LouCarlozo63).

Comments

  1. As a Gen Yer, I agree with your insights about being marketed to from a young age. While I acknowledge that many of my peers are ill-informed, another reason for the perceived cautiousness my lie in the fact that we question if there is a better or less costly alternative before accepting financial advice at first blush. We are simply better informed and have more offerings at our avail than ever. I think many institutions and advisers are slow to adopt to the needs of our generation since much of the wealth is still tied to baby boomers/Gen X. In response we (or at least people like me) shift to alternatives like some featured on this blog e.g. Prosper, Betterment or low cost offerings in online brokerage or investing, e.g. Vanguard. As an archetypal reader of this blog who must put off big purchases in life as a result of investing in my career, these institutions win my trust in the interim. The crazy thing about it is that they have a completely passive approach in obtaining my business.

  2. My wife has had an account at TIAA-CREF for 4 years. Her money is spread evenly across there 5 standard accounts. The total return in this time has been approx. 10%. An equivalent set of accounts of mine at fidelity did almost 40% in the same time frame. The rates of return on their various accounts are bordering on criminal in my opinion. But because tbey are the teachers default retirement account provider they appear to get away with it. They should be ashamed!

    • I don’t know about what “standard accounts” your wife uses… but hopefully not the “TIAA Traditional” which currently has a ~3% flat return. Besides that fund, any of their other standard equity funds (there are a wide variety) returned ~30% over the last year and averaged ~15-20% over the last five. Even my non-equity accounts returned 5-15% over the last five years. Of course I would go with something like Vanguard if that were an option through my workplace, but the fees and returns from TIAA are totally fine with me.
      I advise your wife to meet with a financial advisor… her workplace probably offers free consultations with TIAA-CREF.