For those who lived through the dot-com bubble burst in 2000 and the real estate market crash in 2008, they saw how these financially tough times impacted long-term retirement planning strategies. term.
Fast forward to today, and many people are confident in their ability to save for retirement – even as we emerge from an economically difficult pandemic scenario. Generation Y being the the largest workforce in the United States, they also need to be prepared for future market volatility, although confidence is currently high today.
The cyclical nature of the market will continue and this generation should consider thinking strategically about retirement to help withstand any future volatility.
If it sounds too good to be true …
As with any market bubble, there is an early period when investor confidence is high, but things might be too good to be true. For example, during the real estate bubble in the early 2000s, the surge in house prices was almost incomprehensible, and it was exciting for those who owned properties in hot real estate markets.
The same can be said for internet companies that were pursuing public offerings in the late 1990s when they had little or no income. Today, history may repeat itself with many small emerging tech companies making staggering billion dollar valuations that don’t appear to be based on real business fundamentals.
Being man-made, the stock market and the economy in general are susceptible to irrational behavior that can be short-sighted. In both of these cases, there was a market correction and resulting recession that negatively impacted many people’s retirement portfolios.
With young professionals new to investing and planning for retirement, they may have seen the impact of these recessions on their households when they were growing up.
By keeping these historical lessons in mind, millennials have the opportunity to gain complete clarity on the realities of investing and understand that long-term savings strategies are the most optimal.
Think long term
According to the National Institute on Retirement Security, 95% of millennials do not have adequately saved for retirement. While this can be a sobering statistic, it’s not too late to start saving for retirement.
In fact, the best gift a young professional can give is planning for retirement. The power of compound interest is on your side. For example, if you contribute 10 percent of an annual salary of $ 80,000 into a 401 (k) employee savings plan, you go clean over $ 1.5 million after 35 years.
Unlike baby boomers who have typically worked for a company for their entire career, Millennials are more likely to change jobs frequently. According to a recent Gallup report, 21% of millennials have changed jobs in the last year, which is three times higher than the other generations.
With this in mind, it is best to continually transfer 401 (k) employee savings plans to new employers. There are two options, direct and indirect. The former employer will provide a check for the indirect option. However, these funds must be placed in a new plan within 60 days, failing which financial penalties will be imposed.
The direct option, where funds will be transferred electronically from one account to another, is the most optimal.
There are important lessons to be learned from history – especially when it comes to stock market fluctuations and man-made irrationality.
While millennials may not have experienced market downturns directly over the past 20 years, understanding how to handle potential volatility, as well as how to think (and act) with long-term planning in mind. , will make the path of retirement a strong one.
Vicki Hitchcock is the Head of Audit and Accounting at Gorfine, Schiller & Gardyn, a full service certified public accountant based in Maryland and offering a wide range of services.