“Experiences over things” is a mantra many millennials embrace, but a local wealth manager sees it as a liability to their futures.
Tom DeMeester is managing director of the Grand Rapids office of Kalamazoo-based wealth management firm Greenleaf Trust. He spoke about the obstacles to financial security for the generation born between 1981 and 1996, commonly known as Generation Y or millennials.
DeMeester said while millennials’ sense of community; commitment to service and the environment; free-spiritedness; and passion for personal fulfillment and traveling the world are all good things, if individuals don’t eventually transition to stable, full-time jobs with benefits and invest in durable goods such as real estate, they face a significant risk of poverty later in life.
Greenleaf Trust’s clients primarily are high net-worth families and individuals, so most of the millennials it serves are either part of a well-off family unit or heirs to a trust.
Even so, the firm has seen a pattern of millennials who watched their parents’ generation sustain job losses and medical emergencies during the Great Recession, which may have required them to cash out or draw down their retirement plans early, clear out their savings and sell or lose their homes.
As a result, DeMeester has noticed an abundance of caution in millennials’ approach to saving and spending. Although they are “more conscientious” about finances and in some cases are farther ahead with retirement savings than previous generations would have been at their age, they also are less willing to invest in durable goods.
“The millennials’ focus on experience, it doesn’t necessarily lend itself … to accumulating, so the concept of buying a house or investing in durable goods that might appreciate or at least maintain value, it’s not often a high priority,” DeMeester said.
“Ways that prior generations have accumulated wealth have been through purchasing a home and then maintaining or allowing the home to increase in value over time. And that’s really a deferred goal that we tend to see in many millennials, no matter where they are on a wealth continuum, (whether) a first generation generating their own wealth or whether they’re stewarding resources that had been transferred to them by their parents or their grandparents.”
He added the same deferment approach applies to marriage, family and career.
“We have watched many millennials that focus on experience in their life mandate that the career they choose is one that they enjoy and have a sense of purpose and awareness rather than choosing a job that might financially meet their needs,” he said.
Previous generations were more pragmatic about career choices, DeMeester said.
“No matter what their circumstances as far as scale of wealth, prior generations often would take a job, and maybe it was something that they didn’t truly want or love to do but figured out how to enjoy that work and have value in that,” he said.
“That is probably something that we all need to embrace in early stages in our lives and careers if we want to accumulate wealth long term.”
He conceded it is more “difficult to take several years to figure out what you passionately want to do and allow that compounding earning power of those early salaries or earnings to develop once you get out of school or you move beyond school and into a career.”
DeMeester said he would especially advise millennials to think long and hard about the return on investment of their college education in an era when tuition inflation far outpaces wage growth.
“There’s no question that millennials as a group are maintaining a much larger education debt,” he said.
“That educational experience, while it’s certainly valuable, you really have to get into a career in order to make sense of having incurred that debt. And it’s not uncommon that individuals maybe don’t complete college, or the debt is incurred and (the field is) not something that they find fulfilling, so they go into a different career or something other than what they were trained for. And that educational debt tends to impair many millennials’ ability to accumulate wealth.”
He noted one of the drains on baby boomers’ ability to save for retirement was their desire to give their children a higher standard of living, including paying for their education through parent loans when they probably could not afford it.
“I think that’s where millennials can look as they raise their families,” DeMeester said. “Maybe a community college or a vocational school is a more-than-appropriate educational strategy for their kids, or maybe don’t extend themselves as they think in terms of helping their kids at the same level the baby boomers have, where it impaired their long-term ability to retire.”
DeMeester said millennials should eventually plan to transition out of part-time gigs and into full-time careers with benefits, so they can begin working toward home ownership.
“Often, purchase of real estate is an enforced savings program for many people. While you pay interest through a mortgage, it often historically has been a favorable investment by way of interest rate, as well as deductibility of expenses of maintaining that real estate,” he said.
“If you defer that, there is not that forced savings program that prior generations have embarked on sooner in their lives.”
DeMeester said some people in the millennial generation have hit traditional milestones “on schedule,” but that’s not the norm.
Those looking to start somewhere should establish an emergency fund that covers three to six months’ worth of expenses. The best way to do that, DeMeester said, is to invest in diversified, low-cost, index-based mutual funds, which can be liquidated in a three-day timeframe without penalty.
He said setting aside $1,000 in a high-yield saving account also would be a good approach for covering smaller emergencies, like minor car repairs, or paying off credit card premiums.
DeMeester said the baby boomer generation’s unpreparedness for retirement, whether because of lifestyle choices or the market freefall, can serve as a warning to millennials.
“Those that were exposed to markets during that recession timeframe, if they weren’t able to stay exposed to the markets and not either cash out or have to draw down for life events such as the loss of a job or an inability to meet their expenses, those individuals who stayed exposed to the market really fared quite well through (the recession),” he said.
“Those cycles from the market are always potentially out there. And so, we really do need to prepare. Living paycheck to paycheck is a phrase that’s often said, but it’s really not a good wealth accumulation strategy.”