Millennials are facing a unique mix of financial challenges that include high levels of student debt, precarious income, daunting real estate prices, and a career log jam as baby boomers delay retirement, according to the findings of a new report.
“They’re really on the back foot from the moment that they arrive in their financial adulthood,” says Dr. Brooke Struck, research director at The Decision Lab, which authored the report released in November in partnership with FP Canada Research Foundation.
But at the same time, he adds, “They are shifting their priorities in what it is that they’re hoping to get out of life, and by extension what it is that they’re hoping to achieve with their money.”
All of that means advisors who work with millennials, who are aged 26 to 40, need to check old assumptions at the door and implement generation-specific planning strategies.
The immediate priority, says Dr. Struck, is often a “stabilization phase” to give millennials a sense of control over their finances. Only then can they absorb the risk associated with investments that provide higher potential returns and start building toward longer-term financial objectives.
“A lot of financial planners have noted that they’re surprised by the low-risk appetite of millennial clients,” Dr. Struck says. “But if you don’t know when you might need the money because your job is very precarious and you’re piecing together contracts into this patchwork of a professional life … you can’t really afford to say, ‘I’m going to take on this higher risk.’”
Jarrett Holmes, financial planner at Ironshield Financial Planning in Winnipeg and a millennial himself, says there are several practical ways advisors can help millennial clients stabilize precarious income.
A double-income household may have one partner with a stable salary that can cover living expenses while the other partner’s irregular income is directed toward saving for vacations, a down payment for a home or retirement. If neither one has a stable salary, he says there should a cash buffer in a chequing account that shouldn’t be touched until necessary and rebuilt quickly when it has been breached.
An alternative is an entirely separate buffer account that receives all of the household’s income and pays out a regular “salary” to the chequing account. The idea is to introduce a layer that acts as the employer, “adding regularity to the irregularity.”
That’s in addition to a rainy day fund, which Mr. Holmes says “is for true emergencies [and] not meant to absorb fluctuations of income.”
Mr. Holmes adds that millennials may be planning to withdraw large sums earlier than previous generations – for example, to take a sabbatical. Meanwhile, their ultimate goal is often financial independence rather than retirement – to reach a point in their 50s when they can choose whether or not to keep working.
“They’re investing along different time horizons than financial advisors are used to seeing. … So, [we have] to plan for a potential need for access to capital much sooner than we would regularly see,” says Mr. Holmes.
Facing the ‘adjustment curve’
Liz Schieck, a certified financial planner at The New School of Finance in Toronto and also a millennial, sees a lot of upside for millennials despite a job market that may delay the point at which they’re able to achieve a stable, secure income.
“The ability to build their own careers, how they want to work, where they want to work … that’s something that for a lot of millennials has always been a part of what they’re looking for,” she says.
Many millennials may not have a pension or benefits, but they’re trading that off for flexible working hours, more vacation time, and the freedom that comes with being their own boss, she says. The hands-on approach to designing their careers spills over into financial planning, where she sees a desire to participate in decision-making and stay in control.
However, sometimes it takes a while for millennials to see their situations in a positive light.
Ms. Schieck describes an “adjustment curve” that often kicks in when clients are in their mid-30s. A few years earlier, they were frustrated that their lives weren’t going according to plan. Then, suddenly, they realize they can rewrite and reorder their grandparents’ and parents’ graph of life accomplishments.
That frees them up to craft a financial plan that works for them, Ms. Schieck says.
She finds her early work with clients often includes reassuring them that they aren’t starting to save for the future too late.
“It’s okay if we’re focusing on paying down debt first. That’s an important thing to check off. That’s part of your long-term picture,” she tells them.
Then, Ms. Schieck focuses on building a step-by-step plan that leads millennials from one goal to another, while making sure nothing they do compromise their future goals.
“We don’t have to be planning for everything all at once all the time, because it’s overwhelming [and] we don’t always know what our goals are 15 years from now,” Ms. Schieck says.
She adds that millennials can’t compare their reality to baby boomers’ reality, “because then [they’ll] just feel behind forever, and that’s not productive.”
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