As your baby-boomer clients begin to take distributions from their retirement accounts—thus impacting the revenue and profitability of your practice—younger generations, such as the millennials, may hold the key to the future growth of your business. But knowing how to discuss retirement with millennials can be challenging. Here are some best practices to help set your millennial clients (and your business) up for success.
Understand the Millennial Generation
Millennials make up the generation of individuals born from around 1980 through the early 2000s. These young people face a unique set of challenges. Their life expectancies are longer than any other generation's, they tend to distrust institutions, and they are more risk averse than preceding age groups. In addition, though they tend to save, they often don't invest.
We know from studies that millennials wish to seek expert advice, so the opportunity is there to make them an important component of your client base. But acquiring younger clients and communicating the principles of investing and saving while overcoming their distrust is a challenge. Having a clear and concise message targeted to millennials can bring success. So what will capture their attention?
Leverage the Laws of Compounding
The rallying message to this diverse workforce could be something like "save early, save often"—adapted from "vote early, vote often," a phrase popularized by the nefarious Tammany Hall politicians of 19th-century New York—to bring home the benefits of saving early and of compounding over the long term.
Millennials tend to place a high value on education. For them, a concrete illustration can be extremely helpful. For example:
- Saving $100/month today in an employer-sponsored retirement plan over a 40-year period, compounded at 8 percent, could become a $486,861 tax-deferred account at retirement. Not bad for $48,000 worth of contributions! And that doesn't even include an employer match!
- Contrast that with waiting 10 years and a portfolio that grows to only $217,114. Because of compounding, starting young with a modest contribution can yield greater results than making significantly larger contributions later in life.
Mention Free Money
According to Wikipedia, "Fear of Missing Out, or FOMO, is a form of social anxiety—a compulsive concern that one might miss an opportunity for social interaction, a novel experience, or profitable investment . . ." This may be one reason for the explosive growth of social media.
Why not use social media and this "fear" to encourage millennials to participate in their employer-sponsored retirement plans, especially when the employer offers a match? Use statistics to bolster your assertions. For example, ask a millennial prospect, "Did you know that everyone at your company under age 40 saves at least 6 percent of their pay in the 401(k) plan?"
We all like something for free—regardless of our generation—but most of us harbor skepticism about whether that something really is free. Explain to millennials how not participating in an employer-sponsored retirement plan with a company match is really equivalent to taking a pay cut. How many employees would tell an employer, "Okay, just keep 3 percent of my salary." Again, share a quick illustration about the impact that the employer match can have on long-term savings.
Study IRA Benefits
Some workers don't have access to retirement plans or company matches. This shouldn't discourage them from saving using IRAs. In particular, young workers should examine the benefits of Roth IRA contributions.
With a Roth, taxes are paid up front (as opposed to traditional IRAs, where taxes are deferred). The bet is that the account owner's marginal tax rate is less today than it will be at retirement because tax rates typically increase over time. Young workers are likely in the lowest tax brackets of their careers and have the longest time horizon until retirement. This is a perfect scenario for maximizing growth on Roth contributions.
Combine Employer Plans and IRAs
If a worker is maxing out a 401(k), it's wise to also contribute to an IRA; he or she should consider Roth deferrals in this situation, if possible. Younger workers may be able to contribute the maximum to both a qualified plan and an IRA, even if they are subject to lower phase-outs due to filing single.
Consolidate at Every Move
Millennials will probably work for several companies during their careers. If your millennial clients have already switched jobs several times, ensure that balances in previous employers' retirement plans are accounted for and consolidated. With auto-deferral features in 401(k) plans, employees may have begun building up retirement savings without realizing it!
Do you have any tips or best practices to discuss retirement with millennials? How else can advisors help their millennial clients prepare for the future? Please share by commenting below.