Pessimistic Investment Outlook Means Millennials Will Have to Save More to Retire
With the dotcom bubble having burst in spectacular fashion in 2000, the housing bubble having resulted in the financial crisis in 2008, and now the everything bubble on the verge of bursting, it’s no wonder that many investors have been shy over the years about investing in stock markets. While they can make major gains on the upside, the downside of staying in the market throughout a downturn can be severe.
With major stocks such as Amazon having lost 90% of their value during the bursting of the dotcom bubble, and with major stock indices having lost over 50% of their value during the financial crisis, keeping money in stock markets during a market crash can cost investors years or even decades of gains, gains that they won’t quickly make back. It’s no wonder that many investors are staying clear of markets.
Millennials are among those investors keeping their money out of markets, particularly those who saw their parents lose big during the last two stock market retrenchments. While millennials are widely known for their fear of missing out (FOMO), when it comes to investment they often invest as though they fear losing out, preferring to spend their money on experiences and tangible goods rather than investing for the future.
Failing to save and invest means that comfortable retirement will be far more difficult, and millennials will likely face trying times ahead due to their patterns of spending and saving. But in a way those patterns are perfectly understandable.
Millennials Overly Indebted
Millennials are probably the most indebted generation that has existed so far. A large part of that is due to soaring education costs over the past few decades that have required more and more students to mortgage their future in order to get a college degree. The average millennial carries nearly $35,000 in student debt. While that’s less than baby boomers and Gen-Xers, because millennials are younger and earning less, that sum is a far heavier burden on them.
Because of that student loan burden, plus credit card debt, auto loans, and a standard of living that grows more expensive every day, millennials aren’t able to save and invest as previous generations were. Combine that with wages that have remained largely stagnant over the past several decades and you have an entire generation of Americans who are starting life deeper in the hole than their parents were. That’s not conducive to a healthy labor force, strong consumer spending, or a comfortable retirement.
Millennials Face a Bleak Investment Outlook
It’s bad enough that millennials are starting their careers highly indebted. With wages largely stagnant, they’re finding it difficult to save and invest. But their options for investment haven’t been that great either.
Many millennials have been understandably shy about investing in stock markets, given how recently the financial crisis occurred. Even those who have ventured back into markets likely still feel trepidation about putting their money back into markets that could turn south at any moment.
Unfortunately for millennials, stock markets won’t return to the glory days of the 1980s and ‘90s anytime soon. That stock market boom saw annualized returns of about 15% over that period, making many an investor wealthy. Even the stock market boom of the past few years pales in comparison to that earlier boom.
But predictions for future stock market growth are dire. Many prominent analysts and investment firms are expecting real returns for stock markets to average in the single digits over the next decade. Some even expect real returns to be negative. And that means that millennials will have to save even more of their paychecks if they have any hope of retiring.
According to some calculations, millennials will have to save at least 40% of their paychecks, if not half, in order to be able to retire. That’s how powerful the effect of weak stock markets will be on millennial workers.
With strong stock markets that grow by double digits, millennials don’t have to save as much and are free to consume more. With weak stock markets, millennials are reliant on their own sweat equity and earning power for their retirement security. The latter is looking more and more likely to be the unfortunate reality for millennials, as the formula their parents used to build their wealth no longer holds true.
Are There Other Ways to Build Wealth?
That means that millennials will increasingly have to look to alternative means of building wealth. Stocks and bonds will still have their place in a well-diversified investment portfolio, but the days of being able to buy and hold and continually make gains are likely over.
Millennials will have to look to alternative investment assets such as gold if they want to make investment gains. While gold got short shrift during the ‘80s and ‘90s, it has been the second best performing asset of the past 20 years, nearly doubling the performance of stocks during that period. And with a gold IRA investors can roll over existing retirement assets from a 401(k) plan into gold tax-free, enabling them to benefit both from the tax advantages of their 401(k) and from the stability of gold.
In a world that is seeing conventional ways of doing many things being turned on their head, and in which disruption seems to be the name of the game in many industries, the normally staid world of investing may be the next field to be disrupted. Gold is certainly doing everything it can to shake off investors’ prejudices and demonstrate that it is an investment asset that shouldn’t be ignored.