How millennials can invest wisely for retirement

Millennial investing attitudes and habits don't always move in the same direction.

According to TD Ameritrade's 2018 Millennials and Money Survey, 53% of millennials, meaning those born between 1981 and 1996, expect to become millionaires someday.

But a more recent TD Ameritrade report shows that just 31% of young millennials, meaning those under age 30, are actively saving for retirement in an employer-sponsored plan.

Looking at the numbers side by side, it's clear that the majority of millennials want to build retirement wealth. On the other hand, they don't necessarily how to go about it.

Part of that could be chalked up to millennials coming of age in the shadow of the Great Recession.

"There's a dose of skepticism when it comes to Wall Street and the financial markets," says Brent Weiss, chief evangelist and co-founder of Baltimore-based Facet Wealth.

Beyond a general dissatisfaction with the status quo of the financial services industry, there are other challenges. For many millennials, debt is a key barrier to investing in the future.

"Saving for retirement is a different ballgame than it was 20 or 30 years ago," says Matthew Schulte, head of financial planning at eMoney Advisor. "Unlike their parents, millennials are facing an enormous amount of student loan debt and rising housing costs, which forces them to put retirement planning on the back-burner."

With financial obligations focused on the here and now, thinking long term doesn't land on young investors' radars. Tackling the millennial savings challenge starts with implementing these strategies to grow retirement wealth, with a guide to investing:

End the Waiting Game

Waiting to invest until the time is just right could be exceptionally costly if it means missing out on the power of compounding interest. A 28-year-old who opens a Roth individual retirement account today and contributes $6,000 per year would have $910,000 for retirement saved by age 67, assuming a 7% annual rate of return. Waiting until age 35 to start saving, on the other hand, shrinks that to $565,000. The simplest way to start is to take advantage of the tools that are already available such as through an employer-sponsored 401(k) plan.

"A retirement plan with a company match is the best investment someone can make – it's an immediate 100% rate of return and guaranteed," Schulte says. "The value of time and an employer match are two assets millennials cannot afford to waste."

Fred Creutzer, president of Creutzer Financial Services, says automating contributions to a 401(k) or an individual retirement account is the best way to get into a savings groove. But millennials have to remember that it takes time to grow wealth.

"When you first start contributing to a 401(k), you won't instantly see the wow factor," Creutzer says. "But after five or 10 years, you'll begin to see the positive impact your savings habit has on your finances."

If a workplace plan isn't available, a traditional or Roth IRA is the next best choice. Whether to choose a traditional over Roth depends on income-earning potential.

A millennial who's already reached peak earnings could benefit from the ability to deduct traditional IRA contributions. On the other hand, a Roth IRA could better serve young investors who expect to be in a higher tax bracket once they retire.

Know the Risks

Risk tolerance and risk capacity are two related but very different concepts. The former refers to the amount of risk an investor is comfortable with; the latter is the level of risk required to achieve investment goals.

Understanding the two is essential for shaping a millennial savings plan for retirement.

"Check risk tolerance, make sure your account is properly allocated and know what you're investing in," says Gage Kemsley, vice president of Oxford Wealth Advisors in Rio Rancho, New Mexico.

Target-date funds, for example, are a popular investment choice among workplace retirement plans. These funds adjust asset allocation automatically as the investor's target retirement date draws nearer. For instance, older millennials who have 25 or so years to retirement might consider something like Vanguard's Target Date 2045 fund (ticker: VTIVX). Meanwhile, younger millennials who still have 25 to 30 years until retirement might look at Vanguard's 2055 (VFFVX) or 2060 (VTTSX) target retirement funds instead.

While that's a simplified way to invest, it can be problematic if the asset allocation doesn't align with an investor's risk tolerance and risk capacity. It can also affect risk by limiting diversification.

Creutzer says millennials often misunderstand how diversification works in helping to balance asset allocation.

A 90/10 or 80/20 split between stocks and bonds is a good start but millennials should consider which sectors the stocks and bonds they hold represent. For example, that might mean diversifying across socially-responsible and tech stocks or incorporating a mix of financial stocks and consumer staples.

"A young person can be equity-driven but still be diverse inside those equities," he says.

Look, But Don't Touch

As retirement balances grow, it may be tempting to dip into that money for something like a home purchase but think twice.

"Yes, you can pull money out of a retirement account to buy a home without a penalty, but the long-term financial distress is not worth the benefits," Kemsley says. "Robbing a retirement account for a down payment will reduce long-term growth, which could delay retirement."

Taking a loan from a 401(k) can also trigger tax consequences if a job change occurs. Failing to repay the loan in full after separating from work turns it into a fully taxable distribution.

On a different note, the hands-off approach can serve millennial investors well if it helps them avoid the fallacy of attempting to time the market.

"Many investors prioritize beating the market rather than aligning to an established long-term plan," says Kei Sasaki, regional chief investment officer for Wells Fargo Private Bank in New York. "The risk in chasing markets is getting knocked off the longer-term financial glide path."

During periods of stock market volatility, for instance, it may be tempting to sell investments or stop making new contributions to a retirement plan. This type of loss avoidance strategy can backfire when stocks rebound if the result is a missed opportunity to buy more shares of a stock that's already in a portfolio at a discount.

Colgate-Palmolive Co. (CL) is a good example. The stock's price dipped to a low of $29.50 per share in February 2009 but by February 2010, it had climbed to $42.05 per share.

Attempting to chase returns when stocks are performing well can lead to inconsistent investment results, Sasaki says. The better approach for millennials is developing a portfolio that's tailored to their goals and keeping investments aligned with it.
Don't Plan for Retirement Alone

Chris Brennan, managing director at Cincinnati-based MAI Capital Management, says millennials don't ask enough questions when it comes to retirement.

"They need to go beyond simply signing up for a 401(k) at work and take some time to do research," Brennan says.

Taking advantage of online investment research tools, such as those offered by investing apps like M1 Finance or Robinhood, are a good place to start. But keep in mind that not every millennial investing question can be answered through an internet search. A professional advisor can answer those questions and help develop a tailored retirement planning strategy.

Robo advisors and online investment platforms have made this advice more accessible. Companies like Schwab, for instance, offer self-directed online trading while allowing investors access to investment specialists if they need them.

Working directly with an advisor is also an option to consider for meeting more advanced portfolio management needs. Researching an advisor's services, fee structure and professional background can help narrow the field.

"As long as they know the right questions to ask and look for the right credentials, millennials can find quality fiduciary advice that's right for their situation," Weiss says.