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According to a recent survey by E*TRADE Financial , millennials understand the importance of investing for retirement, taking on a healthy level of investment risk, and planning for the costs they will face when they reach retirement. However, despite the fact that they know what they should be doing, too many millennials aren't actually doing those things.
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So what's getting in the way, and what can millennials do to change this situation?
Mixed dataSome of the data looks rather promising. For example, millennials are more likely to worry about saving for retirement and how to invest smartly than any other age group. And the vast majority understand the concept of taking investment risks while they're younger, with 91% saying they plan to invest aggressively over the next five to 10 years. Finally, more than 80% said that in order to have a successful retirement, you need to save and invest in addition to your 401(k).
So it seems that millennials understand the importance of saving for retirement and know what they should be doing.
However, the data also reveals that millennials' behavior is not necessarily reflective of their knowledge. For example, millennials are more likely than any other generation to have made an early withdrawal from their 401(k). And many did so for silly reasons, like funding a large purchase for themselves. Further, 39% of millennials have not sat down and written a savings and investment plan to help them achieve their goals.According to Lena Haas, senior vice president of retirement, investing, and saving at E*TRADE, there are several reasons for this. For example, many millennials surveyed cited "wanting to live for today" as a major barrier to saving and investing.
What can be done?So how can millennials overcome these barriers to investing and get started? First and foremost, they need to make it a priority to save money.
From dining out less to avoiding bank fees, there are hundreds of ways to potentially cut back on current expenses. Of course, your present lifestyle may suffer a bit as a result, but the changes may not be as dramatic as you'd expect. For example, here is a list of 10 changes you could make that could produce enough savings to build a million-dollar nest egg.
And despite the popular misconception, you don't need thousands of dollars to start investing. Most major brokerages don't have a minimum initial deposit requirement for opening an IRA, so you could get started for a few dollars. Even if you can't invest much, one of the best things you can do is to make the process automatic so that you contribute small amounts on a regular basis. You can set up an auto-debit from your bank account, so start by contributing whatever you can afford.
Once you've started setting money aside, the next challenge is knowing what to invest in. The idea of choosing individual stocks intimidates many new investors, and understandably so.
If you're not confident in your investing abilities, a portfolio made up of a few high-quality ETFs (exchange-traded funds) could be the best solution for you. I often refer to ETF investing as "investing the easy way," because ETFs allow you to spread out your money over an entire index of stocks (like the S&P 500) or a particular sector, like technology, without having to choose individual companies. There are plenty of good ETFs to choose from; here's a primer on ETF investing to help get you started.
Finally, use the tools at your disposal to make your investing easier. For example, many online brokerages offer free or low-cost services that will help you decide how to allocate your capital. And retirement planning calculators like the many offered at Bankrate can help you determine how much you should set aside now in order to meet your long-term goals. Tools like these can make the process take minutes, not hours or days.
A generation of savers?All that said, millennials have done a better job of saving than previous generations had by this point. After all, this is the generation that watched their parents' portfolios evaporate and their homes foreclose during the financial crisis, and data suggests this has scared millennials into saving more.
However, saving and investing are two entirely different concepts. Many savings accounts pay virtually no interest, with some paying as little as 0.01%. If you stick $10,000 in a savings account at that rate, after 30 years, you'll have $10,030. This is unlikely to keep up with inflation, let alone provide for your needs in retirement.
On the other hand, if you invest $10,000 in an S&P 500 index fund, it could grow to $152,200 in 30 years, based on the S&P's historical rate of return. Now, I realize that savings interest rates aren't likely to be stuck at such low rates forever, but there's still a huge difference in the rates of return.
Millennials are saving, but they need to invest and put their money to work. The tools are out there, and it only takes a few minutes (and a few dollars) to get started. If you're among the millennials who want to start investing, there's no time like the present.
The article Millennials Know They Should Be Investing. So Why Aren't They? originally appeared on Fool.com.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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