Millennials' Financial Planning: Better but Not Good Enough

According to a recent report, more millennials (18- to 34-year-olds) say saving for retirement is more important to their financial goals than buying a house. There has definitely been a generational shift toward financial responsibility over the past several years in the wake of the financial crisis. Millennials' financial planning skills are much better than those of other recent generations: They save more, and even though they still take on debt, it's mainly "good debt." While this is definitely a step in the right direction, more changes need to occur before a retirement crisis can be averted.

The latest trends indicate more responsible saving
Similar to those older Americans who saw the sting of the Great Depression firsthand, it seems today's younger generation is learning from the mistakes of the recent past. Borrowing money to buy the biggest house and the nicest car possible doesn't seem quite as good of an idea as it did a few years ago.

Instead, saving money has become a priority once again. Nearly 30% of millennials say saving for retirement is their top financial goal. More impressively, 26% of those in the 18-34 age group say that being able to retire early is their main financial goal -- a huge jump from just 6% in 2011.

Top Financial Priorities of Millenials (2011 vs. 2014) | Create Infographics

This could be due to a combination of factors. More of the parents and grandparents of millennials are being forced to delay their own retirement due to over-spending and under-saving. Also, there are never-ending headlines concerning whether or not Social Security will still be around once they reach retirement age, and a recent survey found that nearly 40% of millennials don't believe Social Security will exist when they retire. Combine this with seemingly constant cuts in pensions and other employer-sponsored retirement plans, and it's no wonder young adults feel compelled to take matters into their own hands.

Is the student loan "crisis" as bad as it seems?
The student loan debt of today's young adults is dramatically higher than that of past generations. Even over the past 20 years, the difference is tremendous, with the average college grad in 2013 graduating with more than three times as much debt as a 1993 grad. However, I don't think that increase is a "crisis," as it is so often painted.

Part of the reason for the increase in student loan debt is rising college tuition, but it can also be attributed to the increased accessibility and desirability of federal loan programs. Student loan programs have made college accessible to millions of young adults who otherwise wouldn't be able to afford college. And there are also loan forgiveness and payment reduction programs in place to encourage students to take out loans.

When we hear about students' high debt levels, we need to remember that the average college graduate will earn approximately $2.3 million in their lifetime, or about a million dollars more than they would be expected to earn without a degree, according to a study by Georgetown University.

So, while the $30,000 debt load carried by today's average recent college grad may sound excessive, it will go much further toward their long-term financial security than other forms of debt like the purchase of a car or even a house.

But do they know how to save the right way?
Despite the increased prioritization of savings, which is a positive effect of the financial crisis, many younger adults have an inherent distrust of the stock market -- and who could blame them? In the lifetime of a 20-something, two major market crashes have occurred, damaging their parents' financial health. However, the perception that "cash is king" has become far too widespread.

Only 42% of millennials have at least half of their assets in stocks or mutual funds. The typical young adult now keeps about 25% of their assets in cash and just 30% in stocks, and more label themselves as "savers" rather than "investors".

Even if millennials get over their fear of investing, many wouldn't know where to begin. Financial education is virtually nonexistent in American schools, and 70% of millenials say they wished they had learned basic investing skills in school. A recent survey by T. Rowe Price revealed that only 3% of Americans learned what they know about saving and spending habits in school, and only 12% learned anything at all about investing.

On the right path but not there yet
More money is being saved by younger adults, who more than ever are choosing to go to college and increase their earning power. However, until we begin to teach our children to save their money responsibly and recognize that cash is not a great investment choice, the "retirement crisis" is a real threat.

As a final thought, consider that if a 25-year-old saves $5,000 per year in a savings account, it will be worth just over $175,000 when he or she turns 60 years old, unless interest rates rise dramatically. That's hardly enough to last for a long retirement. If that same $5,000 per year were invested in a conservative combination of stocks and bonds, and produced 6% average annual returns, the account would be worth more than $550,000 -- an amount much more likely to support a comfortable retirement.