Both generations do not need an advisor to help them manage their finances unless they are making “well over six figures or have inherited a chunk of money,” said Melody Juge, managing director of Life Income Management in Flat Rock, N.C. These age groups should simply focus on saving their income in a Roth IRA.
“Accumulation is the action,” she said. “If you want to have a few million in the bank when you retire, you must simply deposit $150 dollars per month faithfully into some sort of mutual fund account. Roth IRAs are your friend.”
Investing on your own is not an issue until you turn 55 when the focus should be switched to preserving the capital created, Juge said.
What To Look Out for While You Have Time
“The Millennials will then need to begin to address the structure of a detailed retirement plan which continues to include the accumulation component in a different way by using different products and will need help,” she said. “It will also be the time to put attention on how the money will be distributed over the many years of retirement.”
Millennials have the opportunity to be in much better shape than Baby Boomers if they start saving now. While 401(k) plans overall are a good option, many have extremely high fees and few investment options. Invest part of your income into a 401(k) plan if your company is matching and even then sign up only for the amount that you need to get the match, Juge said. Choose a fund that is a bit more aggressive since time is on your side.
Since many 401(k) plans are expensive to run and those costs are often passed onto the employees in a fee, the best strategy is to take the balance of what the IRS will allow you to invest in a Roth IRA. A Roth is a good option because the fees range from $10.00 to $30.00 annually and it accumulates tax free, she said.Investing for your retirement can be as easy as socking away $5.00 a day, which comes to $150.00 per month that can be deposited into your Roth IRA, Juge said. Once you have picked your funds, “read everything available on your fund of choice and your fund manager, so you will feel comfortable,” she said. When the market goes down, take advantage of the lower stock and bond prices and add additional money.
“Time and compound interest are your friends,” Juge said. “When the market takes a nosedive and it will, just continue to place your contributions in your Roth IRA.”
Leveraging Technology: Robo-Advisors and Beyond
Software-based investment services are making cost-effective investment advice available to the masses, said Simon Roy, president of Jemstep, a Los Altos, Calif.-based online investment management company.
”The most important thing for Gen X and Gen Y aspiring investors is to get started with one of these services, which will help them start investing with a decent portfolio allocation and quality funds,” he said.
Working with a service which can offer both online and personal guidance from advisors can be your best bet, Roy said.
“Having the opportunity to review your plan with an advisor before you are 55 can help ensure you are on the right track while time is on your side,” he said.
Anyone can benefit from a chance to work with an advisor even if just starting out in a career with a low amount accumulated, since the financial landscape “looks challenging ahead,” said Chris Costello, CEO of blooom, a 401(k) manager in Overland Park, Kan.
“Luckily, technology and a handful of innovative new companies in the ‘robo-advisor’ space have a chance to solve this problem for millions of people,” he said. “Companies are able to build user-friendly solutions to provide professional financial advice to the masses. Companies like blooom can offer someone with as little as $500 in their 401(k) the same investment advice previously only available to someone with a gazillion dollars.”
Faced with a myriad of important decisions including how to structure the payoff of their student loan debt and how much and where they should invest their money for retirement, Millennials and Gen X-ers should seek the advice of a financial advisor even if it is occasionally, said Michael Solari, principal of Solari Financial Planning in Bedford, N.H.
“Many decisions are dependent on each circumstance and cannot always be Googled,” he said. “Fee-based and commission advisors may do more harm than good.”
Financial advisors do more than tell consumers which stocks to purchase or how to minimize their taxes. They can advise young professionals how to set up a budget, pay down student loan and credit card debt or review 401(k) plans, even from your home.
Solari offers a one-hour session via Skype or Google Hangouts for recent graduates or those who have been in the workforce for just a few years. The virtual session lets consumers voice their issues or concerns.
“Pretty much anything is on the table that won't take an in-depth analysis,” he said. “At the end of the session, I will provide them a hit list summarizing what we spoke about.”
Help, One Way Or Another
Consumers should at least conduct a “financial inventory and assessment” once a year to figure out if they are meeting their goals, said Kimberly Clouse, chief client advocate at Covestor, an online investment management company with offices in Boston and London. If they are not on track to meet them, working with a financial planner “probably makes sense,” she said.
When investors try to assess their own risk without the help of financial planners, they can “make significant errors in estimating risk solely by the size of risky components in a portfolio,” said Bert Brenner, director of asset allocation strategy for People’s United Wealth Management in Bridgeport, Conn.
“Risk is relative,” he said. “Based on age and circumstance, a reasonably prudent risk level for one may be imprudent for another. Risk tolerances are not necessarily rational. A risk that appears acceptable to an investor may be dangerous in reality.”
Investors who are dedicated to setting aside money each month can generate an adequate retirement income as long as they never borrow from it.
“Don't touch the money ever – not for any reason,” Juge said. “Don't tell anyone about the money. Just stash it away for your retirement.”
--Written by Ellen Chang for MainStreet