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If there’s one advantage millennials and Gen Z have, it’ time. As advisors know, the longer a client is invested for, particularly in stocks, the larger the portfolio grows. Ah, to be young again.
Of course, advisors also know that not all young investors take advantage of the luxury of time. In their defense, those clients usually have good reasons why they’re not maxing out 401(k) plans, building up individual retirement accounts (IRA) and other portfolio assets. They’re paying off college loans, saving for houses and trying to start families, among other capital-intensive endeavors.
That doesn’t mean advisors should write off millennials and Gen Z. Actually, the opposite is true. A wide variety of polling and studies dedicated to the subject confirm at least two things of note to advisors. First, millennials and working-age Gen Zers are worried about their retirement savings trajectories. Second, in better news, these demographics are highly open to working with advisors.
One of things advisors can focus on with these generations is the benefit of youth while imparting upon that youth is fleeting.
Harnessing Time Benefit
Clients often like illustrative examples. Here’s one courtesy of Morgan Stanley that can help advisors effectively articulate to younger clients why they should be capitalizing on the advantages of being young.
“Say 22-year-old Bob makes $60,000 a year and plans to retire at 65. He contributes 10% of his pre-tax salary into his 401(k) plan retirement account while his employer chips in 2% in matching contributions,” notes the asset manager. “Assuming he consistently makes that 12% monthly contribution of $600 to Bob’s 401(k) plan account and earns a hypothetical 5% rate of return on such plan investments, he’ll end up with $1,057,228 at retirement.
“Sally, however, contributes $1,000 a month to her 401(k) plan account at the same hypothetical rate of return at Bob, but she doesn’t start contributing to her retirement account until age 45. By the age of 65 she will have $407,458 in her 401(k) plan retirement account—just 39% of what Bob has saved.”
One of the biggest advantages younger investors have is one many don’t realize they have: They don’t have to take substantial risk to build big gains. While they have the luxury of being to absorb big drawdowns because of the time benefit, they don’t need to deal with above-average volatility because slow, steady strategies often pay-off over the long haul.
That’s not to say a 30-year-old client should be over-allocated to bonds. She should not be. A case can even be made that that client shouldn’t have any fixed income exposure at all. Point is, the earlier a client gets to investing, the less risk the client needs to incur to generate substantial returns.
Small Can Turn Big
Another myth frequently held among younger clients that advisors should debunk is that they need to go big or go home. It’s understandable that some younger workers cannot afford to devote large sums of cash to investment accounts, that doesn’t mean they shouldn’t allocate smaller accounts and it’s on advisors to show them the value in small over nothing.
Consider the following from Morgan Stanley:
“Say Bob complains that he can only afford to put away 4% of his paycheck each month due to his student loan payments and tight budget. Assuming the same rate of return for 401(k) plan investment over 43 years and a 2% employer matching contribution to Bob’s 401(k) plan account, he will have $528,614 at retirement—still significantly more than Sally even though his monthly and overall contributions were considerably less than hers.”
Point is an excellent service advisors can provide to millennials and Gen Z is helping them realize and tap the financial benefits of being young.
Related: Clients ARE Bullish on AI. Advisors Need To Understand Why