You’d think millennials would have a hard time investing, what with their limited earnings and piles of student debt. But according to a new Schwab survey, there are a number of things about investing that millennials in particular are getting right.
It turns out millennials are more confident making investment decisions on their own than their older counterparts, even though just 25% of younger workers are investing in stocks. Furthermore, millennials are more likely than any other age group to put whatever extra money they come upon into their 401(k)s.
Not only that, but millennials are particularly fee-savvy when it comes to their investments. More than half of younger workers say they pay attention to fees when choosing how to allocate the money in their 401(k)s. And that’s critical, because more than 90% of Americans on a whole have no idea how much they’re losing to 401(k) investment fees.
But despite the fact that millennials are seemingly on top of things, they still want help with their investments. A good 80% would appreciate personalized investment advice for their 401(k)s, while 93% say they’d utilize a financial wellness program if their employers were to provide it. If you’re a younger investor looking for guidance, here are a few pointers that might help you make the most of your retirement savings:
1. Aim to max out your 401(k), or get as close as possible
One benefit of investing at an early age is getting to take advantage of compounding. That’s why it pays to work on ramping up your savings rate, even if that means making sacrifices in other areas of your life.
If you can’t max out your 401(k) contributions for the year (the current limit for workers under 50 is $18,000, and it climbs to $18,500 next year), do your best, but aim to always be putting in more than you previously did. For example, if you get a raise in early 2018, send it directly to your 401(k). The more you fund that account during the early years of your career, the better positioned you’ll be in retirement.
2. Put most of your investments in stocks
While it’s a good thing that 25% of millennials have money in stocks, that also means most younger workers aren’t invested in the stock market. And those are the people who risk losing out on higher returns, which can further compound over time.
To illustrate the importance of investing in stocks, imagine you’re currently setting aside $600 a month in your 401(k). If you were to keep that money in safer investments, like bonds, you’d probably generate an average yearly 4% return, which means that in 30 years’ time, you’d end up with $404,000. Now obviously that’s a pretty impressive sum, but imagine that instead of a 4% return, you were looking at a 7% return, which is more than doable with a stock-heavy portfolio. After 30 years, you’d be sitting on $680,000. And that’s quite a difference.
3. Load up on exchange-traded funds
ETFs have been growing increasingly popular among millennial investors, and for good reason. Because they simply aim to track existing indexes, they offer the potential for high returns with minimal associated fees. Furthermore, ETFs offer instant diversification, which makes them a safer bet than choosing individual stocks when you’re a relative newbie and don’t know much about investing.
4. Diversify with an IRA
Though contributing to your 401(k) is a great way to grow your wealth, one disadvantage of employer-sponsored plans is that they’re known to offer more limited investment choices. IRAs, on the other hand, tend to offer a wider range of options, which can help you not only minimize your fees, but find investments that align with your personal strategy and appetite for risk. You’re allowed to contribute to an IRA and 401(k) simultaneously, though depending on your earnings level, you may not qualify to double dip on the tax breaks involved. Still, it pays to put some money into an IRA, especially if you’re not satisfied or comfortable with your 401(k)’s list of choices.
The fact that millennials are receptive to help puts them in a good position to grow their investing skills — and nest eggs — over time. If you’re a younger investor looking to make the most of your retirement plan, don’t hesitate to seek professional help, whether with a financial advisor or through your employer. You can also consult our handy investing guide for a strong foundation that’ll serve you well in the years to come.
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