It's no secret that millennials are a hot topic. From their work ethic to their finances, everyone is giving their two cents about how this influential generation will navigate what many anticipate to be a bumpy road ahead.
Although many young people are great savers -- they aggressively pay off their debts and try hard to contribute to their savings -- they are underinvesting, which if not resolved will leave many unprepared for eventual retirement. It seems premature to discuss such a distant objective, but an early start makes a substantial difference, so it's crucial that this generation starts taking a hard look at ways that they can prepare for their future.
As a group, millennials are at a financial disadvantage for many reasons. They witnessed two significant stock market crashes, including the dot-com bubble bursting and the global financial crisis in 2008, which hit their job prospects more than their balance sheets but contributed to a lack of trust in the equity markets despite the long-term track record of returns above inflation.
The previous generation has had tremendous investment success in the real estate market. Looking at absolute figures is not relevant; the real secret has been the relative increase in real estate as compared to median income.
While housing may or may not experience a significant correction, continued multiple expansion is unsustainable, meaning that returns will be lower for those that are entering the housing market today. As we know, millennials are less than eager or even unable to enter into the housing market, and need to start looking at alternative ways to build their equity.
Further, the millennial psyche is entrepreneurial and many are looking to self-employment as a career choice. As a result, many young professionals don't have access to pay into a pension, yet haven't set up RRSPs in anticipation of their future financial security.
Government pensions are vulnerable to the shifting demographic, so it appears unlikely that today's young workers will benefit to the same extent as previous generations -- something that boomers are experiencing also. While over half of millennials have received financial assistance from their parents, recent reports have shown that millennials won't be receiving as much inheritance as expected.
The foregoing combined with the recent economic turmoil has millennials starting to realize they aren't equipped with the proper tools to prepare their finances. So how do we proactively address the combination of the above so the next generation can reach their full financial potential and don't end up unable to retire?
Enter the new investment technologies that are paving the way to healthy finances for the young professionals who view the financial industry as traditional, unapproachable and sometimes intimidating.
Technology-enabled retirement savings will speak loudly to this generation and allow them to think ahead and take a different path than their parents -- a more millennial-friendly path. Using tools to automate funding of a retirement account are crucial for ensuring they "pay themselves first," which is an old mantra but one that will prove extremely beneficial.
Another type of financial technology that will enhance returns versus traditional method and eliminate the middleman is investment technology. To break down the barriers to investing, platforms like Voleo will teach millennials how to take advantage of investment opportunities and empower them with the skills they need to be successful in building and managing a portfolio.
With options to view and follow top investors, validate ideas with those they know and trust, and obtain research and information, Voleo will provide millennials the chance to learn how to invest on a secure and easy to use platform.
Utilizing financial technology can be a strong asset; however, being aware of the hazards beyond changing markets, like investing through traditional investment managers or robo advisors, is important as these can have significant effects on your wealth over the long term.
Doing your research is worthwhile -- for example, robo advisors, while inexpensive compared to traditional investment managers, are effectively funds of funds, charging fees on top of the embedded fees in the ETFs they hold on your behalf. The net result is that a young person who invests an inheritance through a robo advisor over the duration of their career could see a fifth of their wealth disappear in fees. It's no wonder they are popping up all over the place!
Technology provides innovative solutions but it all starts with financial literary, which unfortunately is lacking. To ensure that everyone develops the valuable skills they need to be financially stable, money should be a part of the conversation starting from a young age. Students should be taught the basics of personal finance including an intro to savings, investments, credit cards, debt, mortgages and insurance.
These subjects should be made mandatory to build confidence and ensure that future generations make sensible choices and avoid the pitfalls. It would not take much for this level of basic financial literacy to be integrated into high school education, but until that happens, programs like Junior Achievement are trying to fill the void.
The good news is more and more people are crowdsourcing financial advice online and sharing their expertise, which will inevitably lead to new types of advice and better knowledge among the broader population.
Emerging financial technology and increasing financial literacy will ensure that no matter what challenges they might have to face, millennials and the generations that follow will have the tools and knowledge they need to plan for the future.
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Stashing away cash for retirement investments is a good idea — but first, it’s important to tackle any high-cost debt (with the exception of your mortgage) that you carry. On credit card balances, you may be paying in the neighborhood of 20 per cent interest. If your investments are earning just 8 per cent, for example, you are losing money and not moving ahead financially. Address high debt before you invest.
The Registered Retirement Savings Plan (RRSP) is an essential source of retirement income. Regardless of age, every Canadian of working age should start one. It allows you (until the age of 71) to put 18 per cent of your earned income from the previous year into a tax-sheltered fund. For 2014, the maximum annual amount allowed is $24,270 and $24,930 in 2015. While long-term growth is the main goal, you’ll reap tax savings each year you contribute.
In the 1980s, Government of Canada savings bonds earned between 10 and 15 per cent interest. These days, it’s just 2 per cent — barely enough to keep up with the rate of inflation. That means you need to get better returns on your savings. Instead of government-issued bonds as a low-risk investment option, consider GICs (guaranteed investment certificates) or corporate bonds for healthier earnings. Shop around at various financial institutions for the best rate.
For many Canadians, their homes are the biggest asset they own and, thankfully due to a strong real estate market, it’s one that has grown in value in recent years. You can add to your retirement funds by selling it, and downsizing or relocating to reduce your living costs.
RRSPs are not the only way to shelter your retirement funds from tax. Now, anyone over the age of 18 can open a Tax-Free Savings Account (TFSA) with their bank. The current annual limit is $5,500. Investment income earned from a TFSA is tax-free. Contributions are not tax-deductible, so if your first goal is to cut taxes it may be best to build up retirement funds by making the maximum contribution to your RRSP first.
You don’t have to give up your career once you hit retirement age. You can continue to work on contract, start your own business, or serve as a consultant. Or find a part-time job that allows you to augment the income you will receive from the government and any corporate pension plans.
A balanced investment portfolio should include some stocks. Choose companies that pay out dividends to shareholders, usually quarterly or annually. Use that money to pay for day-to-day living expenses; or during the countdown to retirement, reinvest that money and purchase additional shares for greater earning potential. Ask your investment advisor for recommendations.