Skip navigation
The Unretiring Generation

The Unretiring Generation

With few assets and plenty of debt, investors in their 20s are not on many wealth management firms' or advisors' radars. Yet they haven't written them off entirely.

Michael Prince is in better shape for retirement than many of his age 20-something friends and colleagues. He says he started putting money away when he graduated from college; now 25, he has assembled a $14,000 nest egg in a Roth IRA. Prince had some advantages that others in his generation lacked. He had no college debt when he got out of school, and he was able to save on housing expenses by living with his parents for a few years. A financial advisor who's also a close family friend persuaded him of the wisdom of putting money away early for his later years. He got similar advice at home. “I spoke to my father and he's like, ‘The earlier you start saving for retirement, the better,’” Prince says. “Right now it's very important to get a head start.”

Why does he think so? Prince's current job as a music licensor is a freelance assignment, something that's common among people starting out in the working world but that can make it tough to set aside savings consistently. And like many in his generation, Prince is skeptical about the solvency of Social Security. “From a young age, we've been told that it's never going to be there for us. I operate as if it's not going to be there,” he says. He is resigned to spending more conservatively in the decades ahead — a smaller house some day, or more modest vacations.

Generation Y, born between 1977 and 1994, is one of the largest demographics in the United States, numbering about 76.4 million, according to MetLife research — that's about a quarter of the U.S. population. Also known as Millennials, many of them are reaching their 20s and early 30s, an age when they might begin to invest. And their wealth is projected to grow from $172 billion today to a staggering $13.4 trillion in investable assets by 2030, as they enter their peak earning years and receive family inheritances, according to internal research from Merrill Lynch. Meanwhile, they badly need good retirement advice: They may well see fewer benefits of Social Security when they retire and they have faced a tough-as-nails job market starting out, which makes saving early harder. So it's a group that wealth management firms and financial advisors should pay attention to.

And yet the Gen Y profile with the financial advisory industry is decidedly low. Just a handful of advisors are reaching out to the demographic, according to Deloitte Consulting's report, “A New Breed.” Instead, most advisors prefer to focus their attention on the more affluent Baby Boomers. It's mostly a matter of making the economics work; it's simply not that lucrative to cater to someone with under $100,000 to invest. Forget about a full blown advisory account, with rebalancing and quarterly updates for a fee on assets of around 1 percent.

“The revenue model is, everyone's getting a percentage of assets to provide advice. So if you're trying to take 1 percent and somebody's starting out with $10,000, what are you supposed to do?” says Lisa A. Cohen, chief executive of Momentum Partners LLC, a product and services consultant for investment managers and a columnist for Registered Rep. “How do you serve these people? The reality is it probably takes a minimum of 20 to 25 hours a year to manage an account. It's hard to make an economic argument that you should really be focusing on young people. The math just doesn't work.”

Gen Y is not a big priority for the major Wall Street firms. None of the four wirehouses — Merrill Lynch, Morgan Stanley Smith Barney, UBS, or Wells Fargo Advisors — was able to provide details on what share of their assets belong to Gen Y investors. But Merrill and Wells Fargo do at least have the group in their sights. Merrill rolled out its new discount brokerage platform Merrill Edge in July of this year, which is targeted, in part, at winning over these younger investors, the firm says.

“The younger generation have been kind of left to their 401(k)s, the Fidelities and Schwabs,” says Chris Brown, an analyst and principal at Sway Research. “Now some full-service firms, Merrill being the first, realize if they don't market their services a little more proactively to younger investors, down the road they could lose them.” Brown, a former broker, has conducted extensive research on the habits of younger investors with colleague Laura Varas. He says if Merrill can capture a critical portion of the group, the big payoff, and the big challenge, comes later: As their wealth expands, Merrill must transition these Millennials into full-service relationships at Merrill.

Wells Fargo Advisors, meanwhile, provides marketing material for its advisors aimed specifically at the retirement plans of people in their 20s. One brochure discusses time value of money issues, borrowing advice, and insurance risk. “It is a demographic that we do give thought to. It is a different demographic, maybe not one that's on the forefront,” says Michele Grant, director of IRA products in the Retail Retirement Group. “We continue to work to broaden our tools.”

Charles Schwab has long offered discount brokerage services, which are more affordable for younger investors, but it recently developed a limited marketing effort directed at the Gen Y demographic. The firm launched a Facebook page for its SchwabMoneyWise website, which offers free advice to Gen Y on a host of financial issues. “Our model is focused on relationship-building, so while younger investors in general may not have high levels of assets, the hope is to build a long-term relationship that grows over time,” Schwab spokesman Matt Hurwitz said in an e-mail message.

Sons And Daughters

Not all advisors dismiss Gen Y out of hand. Some are the children of older, more affluent clients, and advisors usually are happy to handle some of their financial affairs as part of the service offered to the parents or grandparents. Eric Bickler of the Sabia/Bickler Group, a UBS Wealth Management practice in White Plains, N.Y., with more than $1.2 billion in assets under management, recently helped restructure a 401(k) plan belonging to the 30-year-old daughter of a client. The account had $30,000 in eight separate mutual funds; Bickler consolidated it into two funds in the same family, mostly in income-producing equities with the smaller amount in fixed income.

At age 34, Bickler says he's not far removed from Generation Y himself. He agrees it's not a demographic that advisors typically work with, given the shortage of assets. But people in their 20s aren't focused closely on retirement either, in his experience. “Most people are disillusioned because, for the most part, anybody that's invested in the markets in the last few years has had a negative experience,” Bickler says. “So it's really just changing that psychology from worrying about what the results were in the last year or two to making sure they're putting away money, even if it's sitting in cash.”

Doug Mavilia, an advisor with Lightship Wealth Strategies, a Newton Lower Falls, Mass., fee-only practice affiliated with Commonwealth Financial Network, says that some of his older clients are using gifting strategies to help out their adult children with retirement planning. One client has been contributing to a variable annuity for a son in his 30s whose family is struggling financially; the parent can gift $13,000 to his son's retirement annuity without tax consequences (or $26,000 if both parents contribute).

But Mavilia, who's 30, also has a number of clients his own age. While his average client is around 40 with average assets of $200,000 to $250,000, about 15 to 20 percent of his clients are Gen Ys. When he started in the business eight years ago, he began acquiring clients within his own age group. The only way to make such a practice work is through volume, given the Millennials' dearth of assets, he says. He charges a $500 fee for a financial starter plan, and 150 bps for asset management at the low end, he says. In order to avoid burnout, he developed a second niche providing specialized products for eldercare attorneys. “It's important to be profitable,” Mavilia says. “If you're not making any money, you're not going to survive in the business and you're not going to be there when [clients] need you.”

A Long Road

It turns out that the age group that gets the least attention from the advisory industry may need it the most. Roughly 40 to 50 years from retirement age, Gen Ys are in the most precarious position among all age groups as far as Social Security goes. The program's most recent projections suggest that its trust fund, which stood at $2.5 trillion at the end of last year, will run out by 2037. That's roughly 10 to 15 years before a typical retirement age — although the potential for relatively healthier lives in the future may mean Millennials will be working later than generations that preceded them. Their strategic advantage, of course, is the fact that time is on their side, which is to say, the magic of compounding. Investments that are set up today are likely to reap the returns needed to accommodate a retirement decades into the future.

Unfortunately, many in their 20s are passing up those opportunities. A MetLife poll of nearly 700 Gen Ys last year found that 40 percent weren't saving for retirement at all, while an additional 12 percent were saving less than they had two years earlier, before the financial crash. Fifty-four percent said the crisis in no way had changed their approach to retirement savings and investing. And a Hewitt Associates study last year found indications that the financial woes that followed the crash may be undermining what retirement savings Gen Ys are setting aside. Sixty percent of employees in their 20s took a cash distribution from their 401(k) plans when they left their jobs, compared to 34 percent of those in their 50s who did a cashout, the survey says. The financial consequences are severe for investors in their 20s. Hewitt estimates that an investor at age 25 who pulled out $5,000 from a 401(k) may lose $75,000 at age 65 (assuming 7 percent return). And don't forget the financial damage at the front end of the transaction; Hewitt estimates that a $5,000 withdrawal might only be worth $3,500 after taxes and early-withdrawal penalties are deducted.

It's easy to see why people in their 20s are hard up for retirement cash. Joan Fernandez, a principal at Edward Jones, says college debt of $20,000 to $30,000 is common in this age group; and then there's often credit card debt on top of that. Plus, even coming by a job is hard enough these days; the jobless rate for people age 20-29 ran at 12.6 percent in the third quarter of this year, the U.S. Bureau of Labor Statistics says. (September's national jobless rate was 9.6 percent in comparison.) When money is available, other investing goals take precedence. In a 2008-2009 poll of 9,200 heads of households under the age of 30 by Strategic Business Insights, “providing for retirement” was considered the most important financial goal by a mere 8.1 percent of respondents. Taking greater priority was buying a home (21.5 percent), providing for “rainy day” emergencies (21 percent), and buying a vehicle (11.7 percent.)

Set It And Forget It?

Not surprisingly, for many Gen Y investors, target-date funds are playing a bigger role in their 401(k) plans. The now popular mutual funds automatically shift asset allocations over time, reducing risk as the anticipated retirement date nears. Morningstar reported that target funds with dates of 2050 and beyond saw net flows of $2.17 billion in 2009, an increase of nearly ten-fold from just three years earlier.

“There's certainly market demand for it,” says Todd Rosenbluth, a mutual fund analyst with Standard & Poor's Equity Research. He notes that 155 target funds with dates of 2050 and later are on the market now. Since the investment timeline is so long, the peer group asset allocation averages 75 percent in equities, Rosenbluth says, with the rest in cash and fixed income. For that reason, Gen Y investors have taken a bigger hit from the financial crash than other generations, everything else being equal. Rosenbluth said the peer group has seen a drop of 6.4 percent over the past three years; the average fund in the peer group gained 32 percent in 2009 but lost 39 percent a year earlier.

But the automated approach isn't terribly popular with advisors. Lori Watt, president of Investors Advisory Group, a practice with $225 million in AUM affiliated with LPL Financial in Waukesha, Wis., says she generally doesn't use target-date funds. “Periodically, we may want to be overallocating to a specific area,” she says.

Watt says she has seen an increased interest by financial advisors in Gen Y investors, “and yet I don't know that it's really a targeted market because it can be time-consuming.

“If you're making recommendations on 401(k) assets, you're generally not going to be compensated for those investments. They're probably managed by someone else.” Perhaps a bigger problem in Watt's view is her sense that young adults don't understand the financial planning process. “With the Gen Yers, when you say, ‘OK, at what point do you want to retire?’ if anything, they might say, ‘Fifty.’ They don't want to really be told that that's not realistic based on their current lifestyle expectations.”

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.