Safety First: How Student Loans Impacted Millennials’ Investment Future

It’s not just about the money— student loans mean millions of young adults are starting their adult lives in the red, and such financial uncertainty has long-term effects on Millennials’ risk tolerance and investment future.

Federal student loan debt recently reached $1.56 trillion, owed by 45 million borrowers who owe an average of $29,200. A staggering 65% of the class of 2018 graduated with debt according to The Institute for College Access and Success.[1] Now in the second recession of their lifetime and with less money to invest due to the additional burden of their loan payments, it is therefore no surprise that Millennials, the generation born between 1981 and 1996 (ages 24 to 39) have been found to be somewhat risk adverse. Young investors may approach their investment futures with more (and frankly, well-founded) hesitancy than their predecessors, preferring to invest more cautiously. While this may be puzzling to some, there are several reasons this approach makes sense given the socioeconomic context in which this generation grew up.

While the sobering reality of student loan payments might lead one to believe Millennials would stick with a job, any job, they can get, they in fact have a reputation for serial job-hopping. This, however, is only partially true and not unique to this generation; young people entering the workforce tend to change jobs more frequently than older, more established workers, and Baby Boomers did just as much job-hopping in their day.[2] In fact, switching jobs can be the best way to advance one’s career, as there are often better benefits offered to entice new employees than those provided to workers who stay with the same company, and Forbes found that staying in the same job for more than two years can decrease lifetime earnings by 50%.[3] Yet even as Millennials pursue better employment opportunities, according to a study by the National Institute on Retirement Security, 66% of working Millennials have no retirement savings, and only 5% are saving adequately. Though two thirds are eligible for an employer-sponsored retirement plan, only about one third (34.3%) participate, and of those who do participate, they tend to prefer low-risk options.[4]

With this understanding, it’s clearly not just about the money— student loans mean millions of young adults are starting their adult lives in the red, and such financial uncertainty has long-term effects on Millennials’ risk tolerance and investment future. Though conventional wisdom dictates that young investors should begin with riskier investments that become more conservative over time, Millennials are not only wary of the uncertainty associated with investment but are in fact the most risk-adverse generation since The Great Depression. LeggMason’s 2018 Global Investment Survey found that 85% of Millennials identified their risk tolerance as “conservative” with a majority identifying as “very conservative.” Blackrock reports that an astonishing 49% of Millennials are too worried about immediate needs to consider investing, compared to 46% of Gen X and 32% of Baby Boomers), and those who do invest are opting for cautious options like CDs or money market accounts.[5]

Millennials, who came of age alongside the Great Recession, student debt crisis, and now the COVID-19 pandemic and the subsequent economic fallout, have every reason to invest cautiously. To adapt to these wary investment habits, offering more risk transparency on 401k dashboards may help bridge the divide between concerned investors and plan sponsors. By providing a brief summary on risk tolerance, employees can easily access and understand the level of risk they’re taking on and adapt it to their personal preferences.

In the end, when it comes to investment any return is better than nothing, and even conservative investments will generate more growth than simply squirreling away one’s life savings in a low-interest savings account. For Millennials, though the instinct to avoid risk and bank on low returns in exchange for certainty is understandable given their debt-riddled origin story, it is often much more beneficial to take some financial risk, however minimal; it’s just a matter of doing it in a way that makes them comfortable.






These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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