Millennials and Investing for Retirement

Michael Douglass:

Kris and I began investing as we could in our late 20s and we are so glad we did. Something is better than nothing; and a little extra is even better.

Millennials as a whole are worried about their finances. In fact, according to a Bank of America/USA TODAY report released earlier this year, 41% of Millennials are “chronically stressed” about money. And it’s hard to blame them. Many graduated into a recession, most are saddled with gargantuan debt, and a large number are stuck inlow-wage jobs.

And it turns out that most Millennials don’t know much about investing either.

The BofA/USA TODAY report mentioned above asked Millennials what they felt they had expertise in (you could pick more than one category). Thirty-four percent said “Social Media.” Twenty-three percent said “Health and Wellness.” Seventeen percent claimed “Personal Finance.”

Five percent said “Investing.”

Five percent. Oof.

Here’s why that has to change
Investing will be crucial to retirement for my generation. We don’t get pensions like many of our parents and grandparents — we get 401(k)s. Social Security will probably be around when we retire, but it will likely pay less in benefits than it does today. And even with today’s benefits, Social Security is only designed to replace around 40% of the average worker’s yearly salary. Most retirement experts say you need 70% to 85% of your pre-retirement income to retire comfortably. So even if benefits were to remain the same — which I don’t see as likely — Social Security still wouldn’t be enough.

The only thing that can make up the shortfall for us is investing.

Investing for the long haul
Millennials are in their 20s and 30s, so we’ve got a good 40-50 years until retirement (and that’s assuming we retire at 65 — NerdWallet published a 2013 report indicating that the average Millennial will probably retire at 73). That time is our best asset. And we can use it best by investing for the long term in quality companies.

Of course, most would argue it’s easier said than done. With thousands of publicly traded companies out there and a financial media that focuses on the inane instead of the educational, you’d be right to be skeptical that “beating the market” is easily done. Heck, mutual fund managers — those experts who are paid to beat the market —routinely underperform instead. If even the professionals can’t do it, how does someone pick great companies for the long haul when even the geniuses can’t sift through all the data?

And the simple answer is that you don’t have to. There is an easier way.

A basket of companies
Exchange-traded funds (ETF) are awesome for new investors because they give you automatic diversification. If there’s a particular concept you find attractive (maybe it’s health care, maybe it’s dividends, maybe it’s energy companies), it has several associated ETFs, each of which carries a basket of companies centered around that concept. They also usually charge very low administrative fees, so you won’t be paying a lot of extra money for the privilege of losing to the market (like with an actively managed mutual fund).

And some of them are really, really broad. You can always just invest in the entire S&P 500 with the SPDR S&P 500 ETF (NYSEMKT:SPY) (expense ratio: 0.11%). This gives you broad exposure across the major sectors in the stock market. And while you can’t exactly beat the market with an ETF that tracks the market, at least you won’t lose to it by much. It’s designed to match the S&P 500, so the goal is for your investment in the ETF to perform as well as the S&P 500, minus the 0.11% annual fee.