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With stocks experiencing a lost decade, bonds barely keeping up with inflation, and savings accounts generating virtually no yield at all, it is a daunting environment for clients to save and accumulate. Many question whether saving is even worthwhile; if the client can't earn anything on money saved, there's little economic benefit to delaying gratification, and the incentive is to just spend it now. On the other hand, low returns also mean that if the client ever hopes to retire, it may require more saving than ever, given that low returns mean less compounding. And so the real question for Generation Y - today's young adults - is which way will it go: will low returns disincentivize saving, or help people redouble their efforts to save even more? 

The inspiration for today's blog post comes from a recent TD Ameritrade survey released a few weeks ago, indicating that Generation Y (today's teens and twenty-somethings) are saving more rigorously for their retirement than their parents and grandparents. According to the survey, 25% of Generation Y (and 23% of Generation X, their older brethren in their 30s and 40s) are saving in their 401(k) plans, while only 16% of Baby Boomers are doing so (despite the fact that Boomers are much closer to retirement, too!).

In some regards, this is a surprising trend. One of the most fundamental principles in financial planning is the concept of the time value of money - that a dollar received in the future is not worth as much as a dollar received today. In investing, the reverse concept is also true: investors are only willing to give up a dollar today if they receive some return (interest, growth, etc.) on their investment when the dollar comes back in the future. Otherwise, there's just no economic benefit to delaying gratification.

Yet for some reason, today's young people are seeing the benefit of delayed gratification, even if their money won't be worth much more in the future (and after inflation, it might even be worth less!). And indeed, it really may not be worth much more down the road, given that Generation Y also seems to be highly averse to stocks, given the difficulties of the past decade, with a whopping 40% suggesting they will "never" invest in stocks in their lifetime, and the typical Gen Y holding 30% of their portfolio in cash!

Nonetheless, Generation Y is saving. And their higher savings levels also implicitly mean that they are spending less, which suggests that not only might they manage to save more than the Baby Boomers for retirement, but they also will need less retirement funds to maintain their lifestyle, as the lifestyle is already more modest due to the ongoing savings in the first place!

Notably, this behavior also suggests that when we lament the low savings rates of Baby Boomers, it may actually have much to do with the fact that they had such high expectations of returns; they really did think they could get away with relatively modest savings, and just hoping that the compounding would work for them. Unfortunately, though, this has clearly not been the case, as the final decade that was supposed to get them to the retirement finish line has instead been a catastrophe of non-compounding. Clearly, at least in retrospect, the baby boomers relied too much on their money doubling in the final decade before retirement, and not enough on savings. One has to wonder if the baby boomers might have been far more prudent savers if the first half of their accumulation years were not filled with a raging bull market that averaged returns in the high teens for almost two decades, ratcheting expectations to unsustainable levels.

In any event, we do appear to be witnessing a remarkable transition: a Generation Y that is actually acknowledging that low returns mean you have to save more in order to achieve goals, and similarly who are not daunted by low returns in their efforts to save and reach their goals. In some ways, it appears that this youngest generation is now beginning to mimic not their grandparents (the Boomers) but their great grandparents, whose formative years were shaped by the Crash of 1929 and the Great Depression and who consequently eschewed the use of debt and stock investing... yet still managed to live modestly, save prudently, and enjoy a not lavish but at least comfortable retirement.

On the other hand, ironically this young generation could present new challenges to the financial planning community, which appears to have a strong self-selection bias towards risk-takers. Will the planning profession be able to adapt and communicate to a more saver-centric, less-stock-oriented client, or has financial planning gone too far in making itself appealing only to risk-takers with its attitude that only by taking stock risks can you achieve retirement success (despite the fact that that formula has turned out to be disastrous for so many Baby Boomers and was unnecessary for their parents)?

In the meantime, though, it's great to see today's youngest generation choosing to view our low return environment as a reason to save more to make up for low returns, rather than save less and give up on delaying gratification. We'll see if the trend can hold.

So what do you think? Are you surprised that Generation Y is saving more, even while earning less and investing more conservatively? Were the Baby Boomers too addicted to high stock returns, or is Generation Y swinging the pendulum too far in the other direction? Will financial planners have trouble relating to a Generation where 40% claim they'll be unwilling, ever, to invest in stocks? Or can the planning profession adapt?

  • Ben Birken

    I guess some of this depends on how much faith you have in that 40% number, and how much that is just a recency reflection. I doubt the number was that high 10 years ago after periods of high stock returns.

    Let’s pretend, just for a moment, that over the next 10 years we have stock returns that are below the historic average but above zero, and that we then ask that same cohort if they would ever invest in stocks. Would the percentage that said they would never invest in stocks still be 40%? I think it’s unlikely, though possible.

    The beautiful thing about true financial planning is trying finding a path that works best for all types of risk tolerances and savings patterns. Some will have a better chance of success than others. My guess is that the planning profession will adapt to higher savings rates and lower risk tolerances by changing the way most planners charge their fees. Instead of banking on AUM percentages and annual increases due to the market, more and more will shift to a flat fee/retainer based model, where the fee is unique or customized based on the complexity of the clients’ current and anticipated planning needs.

  • Marc Sherman

    Interesting post Michael. I wonder how many of those Gen Y savers are living with their parents. I know that Gen Y’ers (of which I am one) typically live at home much longer than previous generations. They are also delaying marriage and family for longer. Perhaps they can save more because their costs are low?

    As for your observation about delaying gratification in exchange for something, even without growth in saved money, these Gen Y’ers may simply see the value of spreading their consumption across their life in a way that allows them to live their last few years without working. If you are not going to work until the day you die, saving still has value even if real returns are negative!

  • Sophia

    Michael, I love this post! As a member of Gen Y I found this so interesting! We have starting taking on a few Young Accumulators as clients and the trend we are seeing with our Gen Y clients is that they are really nervous about investing, and also have a stock pile of cash. I think it’s important to remember that these clients saw the tech stocks crash and the 2008 crash and so they don’t have a lot of confidence in the stock market. They’ve witnessed their families lose their homes, lose their jobs, and lose their retirement savings, therefore they tend to have a huge emergency fund because they’re scared that’s going to happen to them. I think that one of the problems that Gen Y will see later is that they aren’t earning enough on their retirement accounts to keep up with inflation, but right now they have a tough time stomaching any losses. It’s quite interesting. With Baby Boomers entering the withdrawal phase of their portfolios, I’m surprised more planners aren’t focusing their efforts on bringing in more Gen Y clients. I know that the companies that are doing this are having a lot of success, but the majority of the FP community seems to dismiss us as “Not Profitable.”

  • Michael Kitces

    I have no idea what the cross-section is of savers who do live with their parents versus not, although clearly it would be no surprise if they were related. Nonetheless, I still find it a fascinating trend; ask a Baby Boomer if they ever would have considered moving back in with their parents for a few years after college to save money while getting started, and it would have been anathema. Amazing how the culture has shifted, and that it can support better financial prudence as well perhaps!
    – Michael

  • Michael Kitces

    I’m sure the 40% number wasn’t as high 10 years ago, but that’s kind of the point – because 10 years ago, there were no Generation Y savers. They were all still children. The emergence of Gen Y into the workforce is something that began in earnest over the past 10 years. And when their formative 10 years are rooted in a painful bear market, it can change investing attitudes for life. Just look at the generation whose formative years occurred around the Great Depression. It wasn’t just a recency effect; a huge swath of them NEVER returned to equity investing (although many still managed to retire!).
    – Michael

  • Ben Birken


    I think what I’m driving at is that this finding will only hold true weight if the percentage of Gen Y members that never invests in stock during their lifetime stays at 40%, assuming we could periodically check in on the this cohort. I suspect that it won’t.

    I have seen my fair share of Gen Y people come in with cash over and above what they need in terms of an emergency fund. But for the most part, they were looking for reassurance that it really was ok to invest in stocks from someone who looked like them (I’m 34) and wasn’t one of their parents or grandparents. They weren’t so rocked to the core that they needed hours and hours of convincing, or were completely opposed to the idea altogether. Instead, like Sophia mentions below, they needed a financial planner, not a faceless website or iTunes application.

    I’ve actually been pretty impressed by the financial savviness of my younger clients. If they want to save more aggressively in a world of diminished returns, then so much the better.

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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