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Financial Planning for Millennials

Despite a variety of unique challenges—from unprecedented student loan debt to a retirement that looks less and less traditional—millennials are in a strong position to both bolster their current personal financial situation and make substantial headway on long-term financial goals.

Whether just dipping a toe into the job market for the first time or a few years into their careers, here are a few money-related factors millennials should contemplate as they plan their financial future:

The Debt Challenge

Millennials are one of the most indebted generations yet—recent graduates leave school with an average of more than $37,000 in student loan debt, which can make achieving other financial goals, such as purchasing a home or saving for retirement, considerably more difficult.

If you’re attempting to tackle an unwieldy student debt load, the following strategies may help:

  • Explore flexible repayment options. If your current monthly student loan payment has you stretched too thin, give your loan servicer a call or visit studentaid.ed.gov to explore a variety of other repayment options that may be available to you.
  • Refinance. If you have good credit and a steady paycheck, it may be possible, depending on the lender and terms, to refinance student loan balances and take advantage of lower interest rates and/or lower monthly payments. A caveat: Refinancing federal loans makes it impossible to access flexible repayment terms in the future, so be sure to familiarize yourself with all the terms.
  • Buckle down. Committing to a leaner financial lifestyle and a realistic budget can make a big difference as you work to whittle down that student loan balance. You won’t be alone: According to an analysis by Trulia for the Wall Street Journal, nearly four in 10 millennials live with their parents. And in this gig economy, picking up extra cash on the side—via, say, Airbnb, Uber, TaskRabbit, Upwork—is easier than ever. Examine your budget to see where you can trim back on spending or increase your income, then allot those funds toward your balances.

Reconfiguring Retirement

As the traditions and social mores around post-career life continue to evolve and shift, millennials will likely be faced with a set of vastly different options, challenges and opportunities in retirement than previous generations.

If you’re a millennial attempting to prepare for a retirement that looks nothing like the one your parents or grandparents enjoyed, consider these options:

  • Forget about conventional retirement. “We believe that the traditional path of education—work, retire—will become a thing of the past,” says Morag Barrett, CEO of leadership development firm Skyeteam and co-author of the forthcoming book, The Future-Proof Workplace. Now that we’re living longer, retirement may represent the switch to a less demanding or part-time career or finite periods of work between sabbaticals. Millennials will need to put more thought into their second—or third, or fourth—acts and how to plan for them financially.
  • Contribute to a 401(k). Only 30% of workers between ages 20 and 29 signed up for a company 401(k) if they weren’t already auto-enrolled, according to a recent T. Rowe Price report. And the median millennial 401(k) contribution is only 6%, even as experts suggest that number may need to be closer to 22%. At the very least, aim to contribute enough to get your company match—otherwise, you’re essentially giving up a portion of your salary—and enroll in your 401(k)’s auto-increase option, which bumps up your contribution by 1% every six months until you hit 15% or more.
  • Leave your 401(k) alone. More than four in 10 millennials (43%) have taken an early withdrawal from their retirement savings plan, which is a bad idea: If it isn’t a qualified withdrawal, you’ll be on the hook for taxes and penalties while simultaneously shrinking your retirement nest egg. Build up your emergency fund so you won’t have to dip into tax-advantaged accounts if a major bill pops up.
  • Add other kinds of accounts. Consumers need a mix of both pre-tax and post-tax investments. Why? First and foremost, retirement is unpredictable. Also, in some cases 401(k) expenses can have a significant impact on your bottom line, so it may make sense to include traditional and Roth IRAs in your plan. Traditional IRAs are still pre-tax accounts, but often have lower fees than 401(k)s, and Roth IRAs are post-tax accounts, so contributions can be withdrawn anytime tax free. Annuities are another potential vehicle you should consider. A financial planner can help you determine the best mix for you.

Planning for Health Expenditures

When employers offer a high-deductible health plan (HDHP), four in 10 millennials over the age of 26 choose it, according to a BenefitFocus report. Which means they not only have access to a Health Savings Account (HSA), but in many cases their employer is funding one for them. Alternatively—or sometimes alongside it—many millennials have access to Flexible Spending Accounts (FSAs) that can help them lower medical costs overall.

If you’re attempting to tackle rising healthcare costs, make sure you:

  • Look past the premiums. Before choosing a health plan, consider all your costs, not just the monthly premiums, which are lower for HDHPs. If you’re someone who frequently sees the doctor, has children, or don’t have the cash to cover a hefty deductible, a more traditional health plan may be the smarter long-term buy. If you’re unsure, track your health costs for a year—doctor’s visits, prescriptions, co-pays—and run the math during your next open enrollment to see which plan would cost less.
  • Contribute to an FSA. An FSA allows you to pay for a variety of medical expenses with pre-tax money. For example, if you’re in the 25% federal income tax bracket, you essentially save 25% on medical bills paid from your FSA account. In many plans, you can now carry over up to $500 in your FSA from year to year.
  • Take charge of your health costs. If you are in a high deductible health plan, that means that the first big chunk of medical expenses comes directly out of your pocket, so it pays to be smart about your healthcare. Call medical offices and find out how much you’ll be charged for a procedure before you go—you’d be surprised at the range of prices. For routine care—tests for strep, flu or ear infections, for instance—consider a regular office visit over urgent care. Make contributions to your HSA to match your health expenses, as every dollar you spend from an HSA saves you on taxes, and the money in an HSA rolls over year to year.

On Spending, Saving, and Salaries

Millennials earn about 20 percent less than boomers did at the same stage of life, according to an analysis of Federal Reserve data. That makes it harder to save for a house, save for retirement and manage debt payments.

If you’re attempting to tackle financial goals on a lower salary, the following strategies can help:

  • Live by a budget. When money’s tight, you can’t fly by the seat of your financial pants. Watch your cash flow carefully so you can be sure you’re putting your money to its best possible use. That might mean making the most of last year’s wardrobe and choosing a national park vacation over a Mexican all-inclusive resort splurge.
  • Beef up your emergency fund. If you’re living on a modest income, having an emergency cushion takes on even greater importance—according to Bankrate, three out of five Americans incurred a major unexpected expense last year. Without an emergency fund, that surprise medical bill or car accident could put you into credit card debt or cause you to miss a payment elsewhere. Set up an automatic payday transfer to an interest-earning savings account and don’t touch those accruing funds unless it’s an emergency.
  • Automate as much as possible. Take willpower out of the equation—put as much of your finances on auto-pilot as possible: Sign up for 401(k) contributions, emergency fund transfers on paydays, and even automatic debt payments each month. What’s left over is yours to spend on the rest of your life, secure in the knowledge that your priorities have been met.
  • Have patience. Millennials will likely catch up in income as they scale the corporate ladder—indeed, some of the lag between generational paychecks is attributable to millennials pursuing more education overall than boomers. So they might have less work experience at the same age, but plenty of potential. Keep your nose to the grindstone and watch the numbers climb.
NOTICES AND DISCLOSURES

The information contained herein is for information purposes only, is not designed to address your financial situation or particular needs and does not constitute the rendering of tax or legal advice. You should consult with your tax advisor or attorney for advice pertinent to your personal situation.

Asset Allocation, Alternative Investment and Hedging/Diversification strategies are intended to mitigate the overall risk within your portfolio. Some strategies may be subject to a higher degree of market risk than others. An investor should understand the costs, cash flows and risks inherent in a strategy prior to making any investment decision. There are no guarantees that any strategy presented will perform as intended.

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