Three ways to get millennials to save for retirement
While this demographic is money savvy, they still need to be told why they need to save.
By: SARAH BARMAK
Date: November 12,2015
Many twenty somethings and early-thirty somethings don’t think much about saving for retirement. They have other looming priorities – house payments, childcare costs, student debt repayments – and some would simply rather spend their money than save it.
Of course, we all know that saving early is the key to retirement success. So it’s incumbent on financial institutions to strengthen and develop their relationships with millennials as their incomes and assets grow.
How can advisors convince their younger clients to take retirement seriously? Take these three approaches.
1. Explain the power of compounding
One of the best ways to get millennials to save is to explain to them why saving now can lead to big gains in the future. In other words, talk to them about compounding interest.
Andrew Rice, an advisor with Toronto’s Stewart & Kett Financial Advisors, often shows millennial clients a chart that tracks two people aged 18. One person saves $2,000 a year for eight years and stops when she’s 26. Another saves $2,000 a year for 40 years, but doesn’t start until age 26.
Both end up with about $800,000, even though the first person invested a fraction of the money the second did. (The chart, which was created a few years ago, uses a 10 per cent rate of return rather than the roughly five per cent people might expect now, but the principle still holds.)
“Get the client aware of the magic of compound interest,” says Mr. Rice.
It’s also important to explain that compounding can work the other way – that those high-interest-rate credit cards can leave a person in a giant hole if they’re not paid off.
When it comes to saving itself, millennials aren’t automatically going to put their cash in an RRSP – most are familiar with the TFSA’s benefits, too, says Peter Bowen, vice-president of tax research and solutions at Fidelity Investments.
For this cohort, a TFSA may, in fact, be the better option.
"They’re at relatively early stages of their careers, so they’re not into the highest tax brackets,” he says. “The benefit of the tax deduction that goes along with an RRSP is not that great if you’re in a lower tax bracket. Advisors should help them analyze what kind of savings account they should use.”
2. Avoid the R-word
Advisors tend to talk a lot about retirement, but focusing on the “R-word” may not work with some millennials. First of all, these are young clients, and retirement may still seem like a long way off.
Some may also still be in school or shouldering heavy amounts of student debt, and they may not yet have a steady full-time job.
If they’re not ready to think about retirement, then don’t focus on it, says Mr. Rice. Rather, talk about how savings can help them attain more immediate goals, like buying a car or a house.
“It’s not necessarily savings for retirement,” he says. “They’re trying to set money aside so they have more choices later in life. That might make more sense to someone who is starting an entry-level full-time job.”
3. Encourage company savings
While the pension-plan landscape has changed over the years – most workers won’t be saving into a defined benefit plan anymore – many companies still offer some sort of workplace savings, such as a group RRSP or a defined contribution plan.
A number of companies also offer matching contributions – if a client puts in five percent of their salary, for instance, the business will put in five percent as well. This might be the easiest way to get millennials to save, says William Walsh, director of the Joseph I. Lubin School of Accounting at Syracuse University.
These contributions also compound tax-free until they’re eventually withdrawn. And the money is taken off the top – most clients will barely notice it’s gone.
That ultimately makes planning easier, he says. Future goals, whether it’s debt repayment or saving for a house, should be based on the money generated after those group RRSP or DC payments are made.
Millennials may be more of a do-it-yourself group than their parents were, but when it comes to money, most are aware that they need some help to manage their finances. Show them why saving now matters, and they’ll grow their nest egg in no time.