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What millennials need to know about their money

Financial planning has changed over the years


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Nearly 80 million strong, the millennial generation (ages 18-34) is starting college, careers and families. And of this group, 6.2 million millennial households are earning at least $100,000 annually, according to a report by millennial marketing research firm FutureCast. In the wake of this generation boom, advisors are preparing for a shift in their client demographic and an understanding of how millennials view money and managing their wealth.

While the commonly given advice, “Save early and save often,” never loses its significance, financial planning considerations have certainly changed over time. Gone are the days where employees anticipated 30 or more years of service at a single company. Or when pension plans were in abundance and college tuition cost less than a home. Because of these economic changes, advisors are taking a more targeted approach to how they plan for their clients based on their unique circumstances. One size no longer fits all.

UMB’s Private Wealth Management team recently considered some of the most common questions coming from millennials and compiled a list of responses they would give, should they be advising their “millennial selves” today:

1.) Where do I seek out financial advice if I'm not considered 'high-net-worth?'

Many wealth management firms have financial advisors who work in the emerging wealth market area. If assets are modest, it’s a good idea to establish a relationship with an advisor early on so you begin the process of accumulating – and later preserving – any wealth. Regardless of asset level, an advisor will help you get organized, determine what debt (if any exists) should be paid first, and outline a savings and investing plan. Remember, having no plan is still committing to a plan.

2.) For millennials who have just graduated, what's most important at this phase of financial planning – boosting retirement savings, paying off student loans or saving for a home?

Typically, there are two different thought processes on this topic:

Option 1: Pay off debt first, build two-to-sixth months of your monthly expenses in savings, begin to tuck money away for retirement, and lastly, work toward buying a home.

Option 2: Purchase a home first, set a budget, and gradually pay off debt while beginning a retirement savings account.

Both of these options offer benefits and challenges. First and foremost, you need to identify your own personal comfort level with debt and your ability to save.  No matter which option is right for you, by saving for retirement early you will see a larger impact year-over-year as opposed to waiting. With the first option it is easy to allow unforeseen expenses and priorities to derail your savings plan, which ultimately can postpone home ownership. Overall, it is most important to define an approach that is feasible for you, and stay disciplined in executing it.

3.) I've just paid off my student loan. What do I do with the extra income?

If you haven’t already, establish a relationship with a financial advisor and put together a savings plan that addresses short-term needs such as a home purchase and emergency funds, as well as long-term needs like educational expenses for children and retirement.

4.) Rent or buy? What would you say to a millennial seeking to achieve home ownership in the next few years, but with student loan debt making saving difficult? 

It is almost always a good thing to pay down debt before taking on additional debt with a home purchase. Therefore, we advocate paying off the student loan or paying it down to a manageable level, then pivoting toward saving for a home purchase. Paying down the student loan debt first puts you in better position to borrow for a home purchase, as well.

5.) Millennials in the workforce: I’ve just started a new job and I’ve got the option to participate in the company’s 401k and other benefits. How do I know how much to allocate from my paycheck into a retirement savings account?

Make an appointment to meet with an investment professional, formulate questions and be honest with your banker about your goals and full financial picture. Also, pay close attention to the individual retirement account (IRA) allowable amount to be placed into your 401k and other IRAs. If you are able to live comfortably while placing the maximum allowable amount into your 401k and IRAs, keep up the great work! If you are not able to contribute at the maximum levels, start out with what you can afford. You will also want to find out if your company matches a certain percentage that you contribute. If they do offer a match, aim to contribute enough to receive the company match.  As you grow in your career, increase the amount you contribute. For instance, if you receive an annual raise of 4 percent, consider increasing your 401k contribution by 4 percent on the date your raise occurs (of course remember to keep the maximums in mind). 

6.) Millennials in the workforce: Can I start a health savings account if my employer doesn't offer one?

If you are covered by a high-deductible healthcare plan, you are eligible for a health savings account (HSA), provided you are not claimed as a dependent on someone else’s tax return or enrolled in Medicare. There are many benefits to contributing to an HSA, such as income tax deductions of contributions up to $3,350 for individual coverage or $6,650 for family coverage in 2015, and $3,350 and $6,750 in 2016, respectively. Another feature of HSAs versus flexible spending accounts (FSAs) is that annual contributions may accumulate year-over-year for future medical expenses whereas flexible spending account contributions do not roll over. Any remaining balance in an FSA expires at year-end, eliminating the opportunity to use those funds for future medical expenses.

7.) Millennials with kids: We both work – what are the benefits of the child and dependent care tax credit?

The child and dependent care credit is a tax break specifically for working people. If you have paid for childcare service or care for a qualified dependent adult, for the purposes of seeking employment or working at an income-producing job, you are eligible for the credit.

Many tax credits have income limitations, and while those with higher income may see a reduced amount tax credit, people of all income ranges will get some benefit by accounting for their costs on their income tax returns. For one child or other qualified dependent, the maximum eligible claim amount is $3,000, and that amount increases to $6,000 for more than one.

It is worth noting that you may be able to save above the maximum claim amount if your employer offers an FSA as a part of your benefits package. This would permit you to save an amount appropriate for your budget on a pre-tax basis and pay for the cost of care from that FSA. Should you choose this avenue, be sure to spend the balance prior to the end of the year, as contributions do not roll over.

8.) Millennials with kids: What investment vehicles can I use to save for a college fund or down payment on a home for my children? 

The most potent investment vehicle for saving for college is a 529 plan. Assets placed in a 529 plan grow tax-free. If you maintain a disciplined approach to adding to the account while your kids are growing, it’s possible to have amassed a healthy and non-taxed chunk of money for college costs when it comes time for them to go. The best way to save for a down payment on a home is perhaps a simple investment account by dollar cost averaging over a period of time and working with an advisor to establish an asset allocation that is based on the anticipated timing of the purchase.

Millennials are estimated to inherit nearly $30 trillion dollars in the next few years. This massive transfer of wealth means that not only will this generation be seeking out financial advice, but they will be seeking advice in successfully managing and preserving transferred wealth. 

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Tanga Alexander

Tanga Alexander is Senior Vice President and Private Wealth Regional Manager in Colorado and Arizona for UMB Private Wealth Management.

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