Millennials and Retirement Readiness: Reframing the Conversation

Famed investor Warren Buffett once said, "The best investment you can make is in yourself." This statement holds great promise in helping to advance the state of retirement readiness for many Americans, especially today's 77 million millennials born between 1980 and 2000 -- most of whom are just embarking on their professional lives.
04/24/2014 08:27 pm ET Updated Jun 24, 2014

Famed investor Warren Buffett once said, "The best investment you can make is in yourself." This statement holds great promise in helping to advance the state of retirement readiness for many Americans, especially today's 77 million millennials born between 1980 and 2000 -- most of whom are just embarking on their professional lives.

As the parent of two millennial children, I can say with first-hand experience that they are not that much different than previous generations -- with maybe a few prominent exceptions. They network constantly, tend to seek more immediate gratification and bring new meaning to the concept of a mobile society.

Growing up in an age with such services as instant messaging and On-Demand TV, millennials have been conditioned to expect and insist on immediate results, making retirement planning easier said than done. But as young adults, they often lack the proper focus to think about their retirement. And who can blame them? It's certainly not an immediate concern, like rent, car payments, student loans or their weekend entertainment budget. A critical factor in achieving retirement readiness for millennials is to first frame the issue of saving and investing in a way that is relevant and meaningful to them.

That means instead of imagining themselves 30 or 40 years down the road, they should focus on today and how they can become the living, breathing conduit to their future financial success by recognizing and taking stock of their human capital.

The Millennial Asset Class: Human Capital

Investing for retirement typically involves a discussion about the value of balancing risk and reward through proper diversification between assets classes. The discussion however, rarely involves the value of investing in a different type of asset class -- yourself. And for the "instant gratification and mobile generation," a focus on bettering yourself for your future earnings -- or growing your human capital -- is a more immediate, engaging prospect.

Simply put, human capital is the ability to make money by applying knowledge, skills and labor in the workforce. Anything you do to increase your ability to earn higher future wages is typically an investment in your human capital. This includes earning an advanced degree, on-the-job training and honing your skills, networking and etiquette in the workplace. Millennial's can maximize their human capital through education, work experience, or by optimizing their digital strength in social and professional networking.

A rough measure of human capital is your expected remaining lifetime earnings. As a basic example, if you worked for forty years at an average annual salary of $50,000, your human capital would be $2 million. This is important because it helps determine the amount of investment risk you might consider taking today based on age and number of years remaining in the workforce. Time plus your earning potential would overcome any dips you might encounter from more aggressive investments or market downturn.

Millennial's will never have more human capital than they do as young working adults. As the value of their human capital increases, it will produce more financial capital that can then apply to longer-term savings.

Prioritizing Payments: Pay Yourself First

My daughter is lightning-fast with her mobile phone to make a reservation, get the best price on new shoes or network on the hot topic of the moment. Retirement savings is not one of those hot topics. She, like many millennials, struggle with competing financial priorities -- a mortgage or rent, a car payment, groceries and student loans -- making saving for the long-term seem impossible. There is often times little, if anything, left at the end of the month to set aside in savings.

To balance these competing financial priorities, millennial's need to think about Buffet's advice -- "invest in yourself" and use their growing human capital to pay themselves first. This means that the first payment each month should be directed towards savings -- before paying monthly living expenses and making discretionary purchases. But how does one save for tomorrow when that money is needed to buy food to live today? Start by automatically setting aside a small amount from each paycheck -- at the time it is received -- to a savings account. This process provides the instant gratification millennials expect and removes the risk that funds will be spent before the contribution has been made. Even if only $20 of each paycheck goes into savings, it's a solid foundation that can help set good budgeting habits and will grow over time. As their human capital improves it will generate financial capital that they can apply to retirement savings.

Having access to an employer-sponsored retirement plan can help make the process even easier -- especially if the company offers the added benefit of a match. Matched contributions are like free money and are critically important to not only accumulating savings, but setting millennial's up on the right path to get not only to but through retirement. I recommend saving at or above the company match if one is available. As human capital grows for Millennials, they can allocate higher levels of income to grow their financial capital for retirement.

When millennials pay themselves first, they are making a conscious investment in both their human and financial capital. They are building human capital by giving themselves more financial flexibility and freedom to grow. They are building their financial capital by automatically and regularly contributing to their future retirement readiness.

The Bottom Line

People are living longer today than ever before and millennials will experience even longer lifespans. This digitally-connected generation, like the Baby Boomers before them (of which I include myself), have an opportunity to reframe the conversation of retirement. But the secret to having the financial freedom to enjoy that longevity gift is investing in yourself early in your career and making savings part of your lifestyle today so that you can be retirement ready. After all, Buffet didn't become the most successful investor of the 20th century by ignoring his own advice.


Patrick Kennedy is senior vice president for Voya Financial Retirement Solutions (formerly ING U.S.), a strategic business segment focused on guiding Americans on their journey to greater retirement readiness through employer-sponsored, tax-deferred savings plans, as well as through holistic advice, financial planning and a broad range of retail product solutions for customers nearing or in their retirement.

Biggest Money Mistakes 20-Somethings Make