Retirement Investing for Young People

Retirement investing for young people is changing fast, and for all kinds of reasons, some cultural and some economic.

Take the economy right now. Despite what you may have heard, the United States is not in a depression. Technically, the last recession entered its “trough” point in the second quarter of June 2009. It has expanded since, although weakly and in fits and starts.

The slow recovery, of course, is hardly comforting to the millions of unemployed and underemployed. Now there is evidence that retirement investing for young people means adopting a view of the economy and of saving that is wholly different from their Baby Boomer parents — less optimistic, less trusting, and decidedly more interested in thrift.

So reports The Wall Street Journal:

Retirement planners see a generational change in the offspring of baby boomers. These Americans, generally described as people born between 1946 and 1964, typically were raised by thrifty parents who had survived the Depression. Boomers grew up in a hopeful postwar world, where prosperity seemed to grow with age. Many worried little about retirement and many built significant debt.

Now they are facing a crisis. Unemployment among people ages 55 to 64 has doubled in five years, Labor Department data show. Americans are typically approaching retirement with 401(k) accounts that hold less than one-quarter the amount they need to maintain their standards of living when their work life ends, according to data from the Federal Reserve and the Center for Retirement Research at Boston College. Many of their grown children, fearing that the world isn’t getting much better, are trying to better prepare.

It’s an eye-opening trend, and all the more reason retirement investing for young people requires questioning the assumptions their parents made about the future.

You see this showing up across the economy. Young workers are more particular about spending (Apple iPhones notwithstanding) and more interested in what really works. They are abandoning fixed costs of living such as cable TV and new car payments for simpler and cheaper ways of getting the things they want or need.

For instance, young people are more apt to shop an airline ticket down to the bare-bones cost and stay over on the couch of a stranger they met online through a service. They’ll share a car, take classes online, whatever it takes to get the price that works. Above all, they’ll switch from brands their parents revered without a second thought.

Just about every price point can be compared and considered online, well before a click to buy. You can see the effect of this on the big-box retail stores, which are collapsing under their own weight as online retailers push down cost across dozens of categories. It must be tough to be a marketer these days.

On the other hand, investors have had a great time online. Financial products that seemed mysterious and impenetrable a few years ago — insurance, certificates of deposit, high-yield checking, credit lines — are now bought online without a middleman. Every penny saved is soon converted into lower premiums or higher rates.

Retirement investing for young people is here

Information is power, power is leverage, leverage is money. Retirement investing for young people is no different. Why would anyone pay a broker to buy or sell a common stock when you can do it online? There is a need for advice, sure, and possibly some exotic trading tactics require professional help. But that’s not what most people do. Most people buy and hold.

Similarly, the kind of financial oversight that once commanded a premium — such as building a strong asset allocation — really comes down to a relatively simple set of questions. You could hire a pro to build you a tailored approach, but the truth is he or she will simply sit down at a computer, type in answers to a few questions, and recommend a portfolio.

Tax advice? IRA rollovers? Something more complex? Hire good counsel. They can bring you a true value-add, especially as laws change. It can really help, too, to have a sounding board when you need to make a life decision. Retirement investing for young people, however, is rarely that complicated.

Instead, retirement investing for young people should be about cutting costs on the simple stuff, shaving those pennies and putting them into the portfolio to grow. A solid, well-built passive investment portfolio of index funds and ETFs is something you can construct on your own in an hour or two, online, with little need for costly professional oversight.