Night guy

  By Guest Blogger Doug Rowat

Jerry Seinfeld has a great routine where he talks about liking to stay up late. He enjoys being “night guy”. And the consequences the next day? That’s “morning guy’s” problem. Check it out here:

We’ve all engaged in this kind of thinking and there were probably more than a few of us who behaved like “night guy” after last Sunday’s Super Bowl, leaving “morning guy” to fend for himself. But Seinfeld’s bit actually has ramifications for the more serious subject of long-term financial planning. Planning successfully, of course, means envisioning your future self and recognizing that decisions made today have significant ramifications not only for tomorrow, but also for next year, next decade and so on.

Millennials, in particular, should pay more attention to morning guy. According to YCharts, 65% of US millennials ages 22–37 say that they’ll reach seven-figure wealth by age 45 or sooner. However, millennials don’t sufficiently save. According to the National Institute for Retirement Studies, more than two-thirds of millennials have nothing saved for retirement and 95% are not properly saving for retirement. So, millennials are living for the moment, expect a lot in the future, but aren’t doing enough now to help out their future selves. They assume future wealth but are leaving the actual logistics of achieving this to morning guy.

Most US working millennials have less than $20,000 saved for retirement

Source: National Institute for Retirement Studies

These ambitious wealth targets are partly a function of millennials witnessing the growing ranks of millionaires. Credit Suisse’s Global Wealth Report, for instance, highlights that the US added roughly 878,000 new millionaires last year. Millennials eyeball this data and think that ‘millionaire’ is an easily attainable goal. But it’s a tough goal and it requires discipline.

Change in number of millionaires by country 2017-8

Source: Credit Suisse

Now, millennials do many things right. For instance, they have high (94%) take-up rates for retirement plans sponsored by their employer, but overall they’re still not saving enough. The conclusions of the National Institute for Retirement Studies report were stark:

Sadly, even the iconic estimate of one million dollars in retirement savings may be off the mark. …If low rates of investment returns persist, Millennials will need to save more—much more—from their salaries for retirement.

When combining employer contributions with Millennials’ own contributions to their retirement accounts…the average working Millennial was able to save 10.1 percent of their salary. But, this is not enough. According to financial professionals, this generation should be saving at least 15% of their salary.

Now we can debate whether the world should be doing more for millennials—free education, forgiving student debt, lowering taxes, massages, drone-delivered Starbucks, etc.—but let’s assume for the moment that the world isn’t going to do anything more than it already does for them. What is needed for a millennial to independently help themselves reach that goal of US$1 million in wealth? (Btw, for some Canadian context, only 38% of Canadian millennials are putting money towards their retirement, according to a recent RBC retirement poll. So, the Canadian millennial saving situation is similar to the US’s in that more is needed.) If we take the midway point of that 22–37 age range (so, 29), and give this young person five grand in savings to start, to get to US$1 million by age 45, assuming a 6% annualized rate of return, this ambitious skinny-jean-wearer is going to have to sock way US$3,100/month.

A 29-year-old millennial would have to save VERY aggressively to reach a million bucks by age 45

Source: Ativainteractive

Now, obviously, this is a simplified financial scenario and doesn’t include other potential investments, inheritances, better future employment prospects, etc., but still, how realistic is the million-bucks-by-45 goal? Not very. So the first step is for millennials to moderate their expectations. Making money isn’t easy. By extending the timeframe out to age 65, the million-dollar target can be more realistically reached, requiring a more modest US$625/month in savings (see table below). Canadian millennials, incidentally, feel that they need C$917,000 in personal savings to retire comfortably, according to a 2018 CIBC poll, so this wealth level is also more achievable if a realistic timeframe is set.

However, if this particular millennial continues on a path of weak savings, putting away an average of only, say, $200/month then they will not come anywhere near their target—in Canadian or US dollars (see table below). So, at some point, a disciplined and more aggressive contribution plan must be put in place and sacrifices will need to be made. Night guy is going to HAVE to show some consideration for morning guy.

Wealth of a million bucks is attainable for millennials, but not by savings $200/month

Source: Ativainteractive

So, millennials, think of future-you. Don’t stay up late tonight (or travel excessively, drop 8 bucks on a soy chai latte, eat out a lot, buy a new car, etc.) expecting morning guy to fix the mess tomorrow. In other words, save more now. Night guy and morning guy need to work together.

So, that’s my advice to all you young people. Now get off my lawn.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.