Fact or fiction: Millennials do not have money to save and invest.
Note: This is a continuation from The Millennial Misconception: Introduction post
A large portion of millennials entered the workforce during the financial crisis, and while the global economy significantly recovered between then and up to the Covid-19 outbreak, many felt its long-term consequences. These included wage stagnation, student loan debt and challenges with the ever-increasing cost of living. A 2018 report[1] suggested that, as of 2016, the wealth of millennials was 34% below the level projected had the financial crisis not occurred.
This report also analyzed the average net worth of 20-35 year olds in 2016, compared to the same age group in 2001. This analysis revealed an approximate reduction of US$40,000 in total assets. Millennials also had an average US$10,000 more debt, largely due to student loans, outweighing the liabilities incurred by Generation X which was mostly attributed to mortgages and credit cards.
While this comparison reflects higher levels of debt among millennials, the 2018 Annual Transamerica Retirement survey[2] revealed that 71% of the millennial workers in the United States were saving for retirement. On average, they began saving at the age of 24, which is 6 years earlier than the average age of Generation X.
In the United Kingdom, real estate has traditionally been viewed as a major personal investment vehicle together with employer pension schemes. Figures released in 2018[3] from the Office of National Statistics (ONS), indicated that home ownership among people aged between 22 and 29 had fallen by 10% since 2008 and stood at 27%.
The Millennial Survey[4] conducted by BMO/F&C Investment Trust suggested that two thirds of UK millennials in the same age group were worried about their financial affairs but were determined to save more. While 60% of respondents in the research had similar ambitions to their parents of property/home ownership, their priorities differ.
As Dr. Eliza Filby, a generation’s expert and historian quoted in the report, attitudes and approaches have changed:
“We must stop trying to fit millennials in the baby boomer straitjacket. Millennials will have very different lives and the previously available incentives – great savings rates and pension schemes – do not exist for them today. In fact, they’ve been actively dissuaded from saving or acquiring assets. Millennials still want to buy a home but see it as exactly that – a home not an investment – as Baby Boomers may see it”.
The technology firm Calastone revealed in their survey[5] that 28% of millennials around the world neither save or invest. When asked why, unsurprisingly, the majority of respondents (68%) stated they simply could not afford to do so. For those that do manage to allocate income, savings was the preferred vehicle of choice, the rationale being that buying a property is a key objective and savings accounts are more risk averse.
There are clearly a large number of millennials who are struggling to allocate income for the future which is probably consistent with older generations both today and when they were in their twenties and thirties. However, there are a reasonable number of millennials who are saving which arguably dispels certain myths but this needs to be looked at in more detail to understand how we are describing savings.
Deloitte's most recent Millennial Survey[6] suggested that over half (54%) of Millennials have savings equal to or more than approximately three months of income. In addition, the report suggests that millennials are saving or investing almost 40% of their disposable incomes with only 20% having mortgages.
Unfortunately the report does not dig deeper into is how people define disposable income. This is an important missing piece of the puzzle. Why is it so important? Later in my analysis I will review the possible need for changing buying behaviours and in order to do so, a firmer understanding of how people define disposable income is important. For example, paying £50 monthly gym membership is what I would consider part of my disposable income allocation. I could (and do) go running outside and thus free up that monthly allocation. To others, for many reasons, gym membership is a necessity. Bear this in mind as we progress.
According to Calastone, those that do save, 32% purchase investment products although only 12% buy funds. There are some significant geographical differences, Hong Kong and the US for example 23% and 16% of people respectively have money invested into funds whereas only 4% of French buy funds but 41% of them have tax-free savings accounts.
So while there are a large number saving, many are not investing and when talking about savings it is generally to cover them for unexpected bills or deposits on property. This is another important message for the funds industry. In an environment that has had record low to zero interest rates, great for borrowers, bad for savers, why are millennials not investing more of their savings into funds and will they in the future?
An earlier Deloitte report[7] projected that by the early 2020’s the aggregated net worth of global millennials is set to double from 2015 to an estimated US$19 - 24 trillion. While it is widely agreed that this generation is likely to inherit a higher value of assets than their predecessors, and supported by Paul Donovan, UBS Wealth Management’s chief global economist, who in 2018 predicted that millennials will actually become history’s wealthiest generation[8], placing an actual number to the expected amount of inheritance is subjective, but more importantly, Deloitte's forecasting on the timing is questionable.
Deloitte's rationale is, according to their research, millennials are now reaching their prime earning years - a reasonable statement to make. They additionally claim that 54% have started or plan to start their own business which in turn will result in a meaningful increase of liquid assets. I think that number is rather high but if it is accurate, the authors seem to have avoided the reality that many businesses fail or break even and only a small number succeed to generate such suggested wealth. Finally, they claim that millennials will inherit their baby-boomer's wealth. That is not an unreasonable assumption. Suggesting it will happen in the next few years though is ambitious.
In late 2017, the 13th Resolution Foundation’s Intergenerational Commission (RIIC) report [8] asked what role inheritances are likely to play in closing the generational wealth divides that have emerged in the UK. It noted that millennials are only half as likely to have owned their home at 30 as baby boomers were (substantiating the ONS statistics mentioned earlier), while all cohorts born after 1955 have accumulated less wealth (property, financial assets and private pensions) than their predecessors had at the same age.
The RIIC analysis noted that the wealth accumulated by older generations will result in inheritances being set to more than double over the next two decades and peak in 2035, as the generally high-wealth baby boomers – who currently hold more than half of Britain’s wealth - progress through old age. This finding (while agreeing with the Deloitte expectation of the value) is somewhat more conservative with the inheritance timeframe.
As people live longer, inheritance is delayed. As the RIIC analysis noted;
“…..while inheritances and gifts have a large and important role to play in boosting the wealth of younger generations, they are not a silver bullet for addressing their much lower home ownership rates and slower wealth accumulation. That’s because inheritances will be distributed unequally and arrive far too late in life......
………Even for millennials who can expect an inheritance, this may happen far too late to help them onto the housing ladder, and may be more use for grandchildren’s home ownership. Based on their parents’ life expectancies, the Foundation estimates that the most common age at which millennials inherit will be 61. These wealth boosts will come not at the expensive child-rearing stage of their lives when a larger home is more necessary, but when they are approaching retirement.”
Ouch! If this analysis is correct - it's great news for millennial's children. Given the context of these articles is looking at factors to be considered by the funds industry in attracting new customers, it would suggest that relying on an inheritance boost may not be the answer. So what is?
Put simply, if customers are not buying a product or using a service they do not think is relevant to them, then buying behavior is where the focus should be. As mentioned earlier, this is why understanding disposable income will be important.
Part 2 will explore how challenging buying behavior changes may or may not be.
Sources:
[1] https://www.stlouisfed.org/publications/regional-economist/second-quarter-2018/accounting-age-financial-health-millennials
[7] Millennials and Wealth Management – trends and challenges of the new clientele published by Deloitte. Copy available from https://pdf4pro.com/view/millennials-and-wealth-management-inside-article-12daf6.html
[9] https://www.resolutionfoundation.org/advanced/a-new-generational-contract/
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