I’m 25 & Ready To Invest For Retirement. Where Do I Start?

[This article appears in our October 2019 issue of ETFR.]

The great thing about being in your mid-20s is you have 40-plus years to save for retirement. But how to do it right is tough to figure out when long-term planning is a nebulous concept. Add to that a younger generation’s skepticism about traditional retirement. Still, having long-term savings plans is critical. We spoke to a few financial advisors about what they think is important for millennials to know.

Maddie Parker
Certified Financial Planner
Parker Financial Group
Overland Park, Kansas
What’s important: Having a plan

Having a plan to handle paying off student and credit card debt and saving for retirement is the first step, Parker believes. A millennial herself, she knows many of her peers haven’t yet made a plan. Part of that stems from the idea that retirement is far off, but part of that is also a lack of financial literacy.

Many want to wait until their debts are paid off to save. There’s also fear about investing, since many in her age group saw how their parents’ investments fell during the financial crisis 10 years ago. She explains in simple terms the concept of how to smartly pay down debt while saving, and the need to take on risk at a younger age to reach their goals.

For these clients, she uses basic ETFs like the SPDR S&P 500 Trust ETF (SPY) to get them started, explaining what they’re holding, as she’s found many people may have heard of the S&P 500 but don’t really know what it is. “You try to make people feel comfortable and not stupid for not knowing the answer,” Parker said.

Daniel Milan
Managing Partner
Cornerstone Financial Services
Birmingham, Michigan
What’s important: Creating a foundation

Milan focuses on creating a foundation that includes saving, insurance and paying down debt.

He recommends that younger clients at least get their employer match in a 401(k) program to take advantage of the tax benefits and the money from their employer. He encourages them to enroll in an automatic increase plan to eventually get them to the maximum. The same goes for debt: Pay what’s affordable now and have a plan to slowly increase payments.

Milan also advocates for risk management in the form of insurance, whether it’s disability or life insurance. He also talks about Social Security and Medicare, and that those may be in different forms in the next 40 years, which is why saving now is important. “We try to prepare for the worst-case scenario,” Milan said.

Tim Hooker
Co-Founder
Dynamic Wealth Solutions
Southfield, Michigan
What’s important: Understanding how to take risk

Hooker’s millennial clients have a greater risk appetite, so he invests in technology ETFs like the Invesco QQQ Trust (QQQ) as a core holding, and diversifies with the SPDR S&P Software & Services ETF (XSW) and the SPDR S&P Semiconductor ETF (XSD).

Some of his clients are active on the Robinhood trading app, so there’s a lot of discussion about risks between a diversified ETF and single-stock exposure, and the risks between long-term savings and short-term trading.

“Understanding the different time horizons is important,” he said. While Hooker supports their interest in trading, he also explains that long-term investing is more important, and he shows the impact of compounded growth over time to emphasize the difference.

Experiences like the December stock market swoon can shake up these young investors, so Hooker does some hand-holding. “It’s my job to keep them invested and help to understand their time horizons,” he said.

David Dyck
Head of Client Services & Financial Advisor
WealthBar
Vancouver, British Columbia
What’s important: Focusing on short-term habits to reach long-term success

The concept of retirement is hard to visualize for younger clients, especially with some thinking they may never retire, or that Social Security may not be available in its current form. Instead, Dyck focuses on achieving financial independence so these clients can rely on their own assets to provide for their lifestyle.

He explains millennials’ greatest assets are their ability to earn income and save. “If you can maximize that, that’s the greatest thing you can do to build wealth,” Dyck said.

He has clients set up automatic savings plans, and helps them create long-term goals if they struggle to come up with them. Even if it’s just small amounts, it’s key to establish those habits early, Dyck adds.

Molly Ward
Certified Financial Planner & Financial Professional
AXA Advisors
Houston, Texas
What’s important: Celebrating milestones in long-term savings

The idea of accumulating money for retirement is outdated, Ward suggests, so to get younger people to think about long-term savings habits, she celebrates milestones. That makes savings more tangible and easier to visualize. It’s easier to coach and motivate younger investors if they reach milestones like $100,000 in their investment account.

“We want to celebrate those milestones and achievements rather than focus on one big lump sum at the end of the retirement rainbow,” she said. “I think this is absolutely the most important way that we’ve tried to get younger people to think about saving for the long term.”

She remarked she also tries to dispel the myth that there’s a “hot” stock of the day that will help clients get rich quickly, or that they can put off saving until they make more money.

Kirk Kinder
Owner & Financial Planner
Picket Fence Financial
Bel Air, Maryland
What’s important: Thinking about total net worth

With so many millennials graduating with significant student debt, their ability to invest may be limited. That’s why Kinder looks at a younger clients’ net worth. By focusing on net worth rather than just investments, it shows positive improvements in their overall financial situation, he notes.

“As they’re paying down the debt, their net worth is going up. So even if they’re not investing a ton, if their net worth is going up, they can look at it as they’re getting wealthier. That success builds on itself,” he said.

Many millennials might only be able to invest enough in a 401(k) to get their employer match, which may be as small as 3% of their income. “If you only focus on the investment portion, it may not look like they’re doing really well,” he said.

John Ham
Associate Advisor
New England Investment & Retirement Group
What’s important: Knowing your risk tolerance

Younger generations who start saving early have time on their side and can take on more risk. With that in mind, one of the broadly diversified equity ETFs Ham uses with millennials is the SPDR Portfolio S&P 500 Growth ETF (SPYG) for its growth tilt.

While his firm’s most aggressive investment model is 100% in equities, he doesn’t always suggest it for his younger clients.

In the firm’s moderately aggressive portfolio model, there’s a “healthy” allocation for fixed income. He points out that younger clients may say they have a high risk tolerance but don’t have much experience in down markets. The fourth-quarter 2018 downdraft was a wakeup call for some younger clients. “We used that as an opportunity to talk about why you have a fixed income allocation and reallocating in down markets,” he said.