The Dangerous Denial of Millennials

Millennials, or those born between 1982 and the early 2000s, don't have a lot going for them. They're buried in student debt. A lot of them are unemployed. Raises have been unheard of and job security is a dream.

But one thing millennials have going for them is time.

Most millennials aren't going to retire for another 30 years, at a minimum. Some have half a century or more ahead of them to save. The muscle that compound interest has over these periods is staggering.

So this finding, from a recent Wells Fargo survey, made me cringe: "Half of millennials (49%) say they are confident in their own abilities to earn and save money for their financial future, and more than a quarter (27%) say 'time is on my side for my savings/investments to grow.'"

Only 27% say time is on their side? Even though about half say they'll be able to save for their future?

That's astounding.

Earlier this year, Standard Life asked a group of retirees what their biggest financial regrets were. The No. 1 complaint: "I wish I had saved for retirement earlier."

I won't bore you with statistics on how much you'll benefit from beginning to save in your 20s instead of your 30s. It's huge, and I think most people know it. They get the math.

What I think most millennials are skeptical of is the idea that they'll earn a decent rate of return on their investments. After all, compounding doesn't work if you aren't earning anything. And the last decade has crushed people's return expectations. As economist Russ Roberts put it to me, it's hard to teach your kids about compound interest when they earn half a cent a year on their savings account.

Sure enough, Wells reports: "More than half of millennials (52%) say they are 'not very confident' or 'not at all confident' in the stock market as a place to invest for retirement."

But you know exactly what's going on here: Millennials are taking the performance of the stock market over the last decade and extrapolating it over the next three, four, or five decades.

Which is as irrational as it is predictable. I dug into the historical data to see how the S&P 500 (SNPINDEX: ^GSPC  ) has performed over every 25-year period from 1900 to 1987. Measured on a monthly basis, there are 1,053 of these periods. Here's what I found:

  • The worst return over all 25-year periods is a gain of 153%.
  • The average (mean) return over all 25-year periods is gain of 1,240%.
  • The median return over all 25-year periods is a gain of 959%.

The worst you did was more than double your money. And this period includes the Great Depression, two world wars, and the interest rate spike of the 1970s.

The fact that we put so much focus on short-term volatility in a market where long-term returns have been so astounding is a giant disservice to investors -- especially to those who have time on their side.

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Read/Post Comments (8) | Recommend This Article (15)

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  • Report this Comment On June 17, 2013, at 4:10 AM, herky46q wrote:

    Amazing figures on historical performance.

  • Report this Comment On June 17, 2013, at 5:34 PM, johnluma wrote:

    I wouldn't get too anxious just yet. Millennials are between 20 and 30 years old now, so their views are not different from most of us at that age. They will wake up as they move toward 40 and their financial future and the world become their big responsibility.

  • Report this Comment On June 17, 2013, at 8:53 PM, harmonyjoe wrote:

    I frankly think too much emphasis is put on saving for retirement. Is that all that life is about? Scrimp and save your whole working life so you can live it up when you become a retiree. Forgive me if I find that a little stupid, especially when you start bemoaning the fact that 20 and 30 year olds aren't saving every spare cent they can put their hands on for their old age. Assuming they do this, how are they going to enjoy life in their old age if all they've done all their lives is save money? Take my word for it, if all they've done all their lives is save money, that's all that's going to make them happy when they retire!

  • Report this Comment On June 17, 2013, at 9:19 PM, Smokeyblu wrote:

    Sounds like a grasshoper.

  • Report this Comment On June 17, 2013, at 11:32 PM, enginear wrote:

    I don't know how old hamonyjoe is, but saving 5% or 10% is a simple habit that is far different than 'saving every spare cent they can put their hands on'.

    I agree the CFA's get a little ridiculous in their pleas for more (fee bearing) funds to manage, but they are appealing to those that went through their 20's and 30's with harmonyjoe's attitude and realize that they've missed out on the ability to accumulate enough using the 5% or 10% plan.

    Look at some numbers Joe. Think a little. 10 % is easy (especially if you can weasel an employer match into it).

  • Report this Comment On June 18, 2013, at 3:45 PM, whahoppened wrote:

    At the risk of being lengthy, here's my experience which you could consider a case study. I'm now 12 years into retirement.

    My first 10 years at a decent paying job had a profit sharing which I cashed out ($1800) and spent on my daughters wedding. By the way, it was extremely hard to save that and I worried long how I was ever going to do any better.

    My next job ( which was good planning altho I didn't know it at the time) was with a state university which took me out of SSA but allowed me in its state retirement system. I inadvertently stayed long enough to vest there before leaving.

    My next job was with a company which was bought out by a large established company where I was able to get into 401(k) when that became available(Matching). I finally had enough money to do serious saving! And did so. By the way I was able to max out Social Security by Nov. each year.

    Retirement was a nice surprise. I had enough SSA time to max it, State nearly matched it, and I've got a tidy sum in IRA that I'm busy moving to a Roth.

    I'm touching it so lightly its increasing!

    My regrets are that I followed the advice to put stuff in tax deferred. I would have been better off if I had paid taxes before it went into 401(k) and gained value.

    I'm also doing another thing that sounded brilliant to me when I heard it. As I know I'm not going to need the money, I'm giving it to the kids NOW. I hope my estate will be very small. And I'll know where it went.

  • Report this Comment On June 18, 2013, at 5:46 PM, SteveVaughan100 wrote:

    Whahoppened: thanks for a unique perspective - I'm rethinking my aversion to Roths (I hate to pay that money upfront!).

  • Report this Comment On June 18, 2013, at 8:02 PM, whahoppened wrote:

    Steve: I understand, it was like a thump in the head. Even after two over 65 deductions I'm paying more in income taxes now than I ever did during my working years. Virtually all my conscious saving was in my last 15 years of work.

    I didn't know/understand Roth for the first couple of years it was available. Motley Fool has good stuff to read or get into Scottrade, there's a ton of reading. Wade in!

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