Standard Life, "The Rise of the Millennials," October 2015

Standard Life, “The Rise of the Millennials,” October 2015

By Nelson Graves

The millennial generation is forcing wrenching change in business and finance, but it risks hitting a wall when retirement comes unless young people change their savings habits — or are forced to do so.

Those are the conclusions of a top manager at one of the world’s biggest private equity firms and a leading British asset manager and insurer.

Two alert News-Decoder correspondents tipped me off to the views, conveyed by Blackstone President Tony James on U.S. television and by the UK’s Standard Life in a recent report.

We don’t usually cover such financial views on News-Decoder. But N-D is aimed at the “millennial generation” — a term that is widely maligned by those in the very age group.

When two venerable financial institutions run up red flags for an entire generation, it’s worth paying attention.

For our purposes, millennials were born roughly between the early 1980s and 2000. We will bite our tongue and use the term “millennial” because it’s useful shorthand and not because we think young adults all behave the same way, which we don’t.

“A potential retirement time-bomb”

In its report, Standard Life focuses on the millennial generation’s impact on the investment industry.

That impact is largely familiar: Tech-savvy and connected, millennials have disrupted business and finance (think Spotify, Zipcar and crowd-funding). They are rejecting traditional banking and financing models, and demanding greater corporate responsibility.

But what really caught my eye were the report’s warnings to the young, who it said face “a potential retirement time-bomb” in part because developed countries have ageing populations and low savings rates.

Millennials care about financial returns but shun traditional investment firms and prefer to track — and in some cases, trade — online, often adhering to the advice of peers.

That behavior entails risks associated with herd instinct and the temptation to chase losses.

What is more, a sizable percentage of millennials prefer cash-like investments to meet long-term goals. Hardly a surprise since many of them came of age during a financial crisis and with interest rates historically low.

But a preference for cash over the long term has implications when it comes to retirement planning. “Without taking a modicum of risk, many could find their pension pots insufficient,” the report concludes.

“Poverty rates not seen since the Great Depression”

Likewise, James of Blackstone told CNBC television that U.S. millennials face a retirement crunch unless they save more and reap higher returns.

“Social Security alone cannot provide enough for these people to retain their standard of living in retirement, and if we don’t do something, we’re going to have tens of millions of poor people and poverty rates not seen since the Great Depression,” James said.

His solution? Mandated savings through a Guaranteed Retirement Account. Workers would put 1.5 percent of their pay into the account, and it would be matched by employers.

The U.S. government would guarantee at least a 2 percent return by retirement, but the accounts on average would earn 7-8 percent over time because they would be invested like pension plans — over the very long term — and not be as liquid as some current retirement accounts.

Bottom line for young adults: Keep disrupting business and finance but not at the expense of your retirement security.

It’s never too early to plan ahead. Especially for those in a hurry.

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