For those who have lived through the dot-com bubble bursting in 2000 and the housing market crash in 2008, they experienced how those financially challenging times impacted long-term retirement planning strategies.
Fast forward to today, and many people are confident in their ability to save for retirement – even as we emerge from an economically difficult pandemic scenario. With millennials being the largest workforce in the U.S., they should also be prepared for future market volatility, even if confidence is currently high today.
The cyclical nature of the marketplace will continue, and this generation should consider thinking strategically about their retirement to help withstand any future volatility.
If it seems too good to be true …
As with any stock market bubble, there is an early period where investor confidence is high, but things could be too good to be true. For example, during the housing bubble in the early 2000’s, the soaring housing prices were almost incomprehensible, and it was exciting for those who owned properties in hot real estate markets.
The same can be said for internet companies that were pursuing public offerings in the late 1990s when they had zero or minimal revenue. Today, history may be repeating itself with many smaller and emerging technology companies achieving astounding billion-dollar valuations that don’t seem to be grounded in true business fundamentals.
Being human-driven, the stock market and the economy in general are susceptible to irrational behavior that can be shortsighted. In both of these instances, there was a market correction and a resulting recession that negatively affected many people’s retirement portfolios.
Younger professionals starting out in investing and retirement planning, they may have seen the impact of these recessions on their households when they were growing up.
Keeping these historical lessons in mind, millennials have the opportunity to have complete clarity around the realities of investing, and understand that long-term savings strategies are the most optimal.
Think long term
According to the National Institute on Retirement Security, 95 percent of millennials have not adequately saved for retirement. While this may be a sobering statistic, it’s not too late to get on the path to retirement savings.
In fact, the greatest gift that a young professional can give themselves is retirement planning. The power of compound interest is on your side. For example, if you contribute 10 percent of an $80,000 annual salary into a 401(k) employee savings plan, you will net more than $1.5 million after 35 years.
Unlike baby boomers who typically worked for one company for the duration of their careers, millennials are more apt to change jobs frequently. According to a recent Gallup report, 21 percent of millennials have changed jobs within the past year, which is three times higher than other generations.
With this in mind, it is best to continually roll over 401(k) employee savings plans to the new employers. There are two options, direct and indirect. The former employer will provide a check for the indirect option. However, these funds need to be placed into a new plan within 60 days, or financial penalties will occur.
The direct option, where the funds will be transferred electronically from one account to another, is the most optimal.
History always carries important lessons – especially when it comes to stock market fluctuations and human-driven irrationality.
While millennials may not have directly experienced the market downturns over the past 20-plus years, understanding how to endure potential volatility, as well as how to think (and act) with long-term planning in mind, will make the path to retirement a strong one.
Vicki Hitchcock is a manager, audit and accounting, at Gorfine, Schiller & Gardyn, a Maryland-based full-service certified public accounting firm offering a wide range of services.