Why risk-averse millennials should rethink retirement planning

The latest generation to enter the workforce, millennials — Americans born in the 1980s and 1990s — are the future of financial planning. Today, this group numbers nearly 70 million and by 2020, they will make up almost 50 percent of workers and investors. As investors and retirement savers, this group poses an interesting challenge as a result of spending high school, college and early working years during the financial crisis. Many millennials are wary of the stock market, and their overly conservative approach may be causing them to miss important opportunities to build savings for retirement.

Recent studies reveal that many millennials are generally investing as conservatively as retirees. In one study of investment preferences, those age 22 to 32 said that they chose to put 75 percent of their retirement savings in cash and bonds and only 25 percent in equities. In a second study conducted by the Investment Company Institute (ICI), 74 percent of those under the age of 35 stated that they were unwilling to take above-average or substantial risk with their investments — another indication of this group's tendency to be risk-averse and potentially overlook equities.

Why are young people shunning stocks and what does this mean for their future savings? Their young age at the time of the financial crisis, and the negative emotions connected with this experience, may have a lot to do with it. During the financial crisis, young Millennials watched as their parents' savings, including accounts set aside for their college educations, were lost. Certainly, the financial crisis engendered a lot of negative emotions during very formative years and many millennials may still be shell-shocked and could view stocks with suspicion for quite some time.

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But younger investors who remain overly conservative with their investments are missing out on the benefits offered by equities and are potentially exposing themselves to risks down the road. Take recent stock market performance: The Dow Jones Industrial Average and S&P 500 hit record highs in December, but millennials' wariness of equity investing inhibited them from experiencing potential gains. Additionally, because of the long time horizon stretching ahead of them, this group stands to benefit the most from compounding and the long-term growth potential of equities.

With this in mind, they should consider using the "100 minus your age" rule to determine an appropriate mix of equities vs. fixed income. For example: An investment of $1,000 made between Jan. 1, 1980 and Nov. 30, 2013, if invested in a typical retiree (75-year-old) mix of 25 percent in equities and 75 percent in fixed income, would yield $21,124. By contrast, if you apply the typical millennial ratio (25-year-old) of 75 percent equities, 25 percent fixed income, it would yield $36,087 over that same time period.

Students walk on campus at Kingsborough Community College in Brooklyn, New York.
Melanie Stetson Freeman | The Christian Science Monitor | Getty Images
Students walk on campus at Kingsborough Community College in Brooklyn, New York.

Given the shift to greater individual responsibility in financial planning, combined with uncertain economic conditions and increasing longevity, millennials need advice and engagement more than any previous generations. Unlike generations before them, millennials can no longer count on defined benefits plans that offer both income and predictability, and they need to invest for growth in order to help protect against the uncertainties surrounding Social Security and inflation.

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Fortunately, this group is generally quite receptive to financial advice and will become an increasingly important segment to financial advisors as they continue to amass wealth. To effectively engage them, advisors need to understand their generational experience, expectations and their preferred mode of communication, keeping in mind the following:

The millennial mindset. This generation's financial concerns are about debt and trying to secure a steady income. For many, college loans and associated school debt represent a burden that is a barrier to savings and achieving a desired quality of life. Moreover, the economic downturn and record unemployment has impacted them more than other generations.

We vs. I. Millennials consume just as much information as baby boomers but prefer to focus on collaborative decision-making; they are more likely to want to know the experience of others who are like them in addition to the objective information that is most often sought out.

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Bytes, not breakfast. While baby boomers often like to meet with advisors formally for "breakfast meetings," millennials tend to prefer quicker, less formal exchanges. They consume as much information as baby boomers, but in smaller amounts over time and with far greater reliance on accessing and learning information 24/7 online.

Expertise and empathy. To successfully engage millennial investors, financial advisors need to provide more than advice on investment, but also on those things that money is used for, such as health care, education, caregiving, etc. Moreover, the ideal advisor must show empathy. They must demonstrate that they care about not just their clients' portfolios, but their clients' lives, too.

After living through the financial crisis, millennials' conservative approach to investing is understandable. However, if their reluctance to invest in the stock market continues, many will come up short in retirement. Financial advisors who understand the millennial mindset will be well-equipped to engage these investors, and will be able to help these young savers build financial plan that will make their golden years truly golden.

Commentary by John Diehl, senior vice president of strategic markets for Hartford Funds. He also oversees Hartford Funds' collaboration with the Massachusetts Institute of Technology AgeLab. Follow Hartford Funds on Twitter @HartfordFunds.

Disclaimer: This commentary is the opinion of the author and not intended to be guaranteed investment advice. All investments are subject to risks, including possible loss of principal.