Many Millennials may be missing out on stock market gains when saving for retirement, according to research from LendEDU.
The research found 41% of Millennials are avoiding the stock market and are instead using savings accounts to save for retirement. LendEDU estimates that avoiding the stock market will cause Millennials to miss out on more than $3.46 million by retirement at age 65.
The company did an analysis comparing the expected performance of fully investing in a stock portfolio, fully investing in a traditional savings account and fully investing in cash.
The analysis showed financial markets can be volatile during the short term. However, over a long 38-year time period (the time to retirement for our average respondent) the stock market is confidently the best path of saving for retirement. The analysis found that the 502 survey respondents should expect to accumulate an account valued at $4.95 million at retirement, after fees.
On the other hand, over a long 38-year time period, LendEDU found that respondents who use a savings account to save for retirement will fall short, accumulating an account valued at $1.49 million at retirement. LendEDU notes that savings account interest rate data was unavailable for the full period studied and therefore nominal 3-Month Treasury Bill returns were used as a substitute.
The same analysis assuming that respondents kept their retirement savings in cash, or a non-interest bearing account, showed that after 38-years, individuals should expect to accumulate an account valued at $0.68 million, about $4.27 million short of the individual who invested in the stock market during the same time.Why Millennials Fear the Stock Market
More than half (52.30%) of Millennials report the 2007-2008 financial crisis has kept them from investing in the stock market. In addition, 58.60% said they would consider themselves to be “afraid of the stock market.”
Among those who said they were afraid of the stock market, 60.41% said “I am worried about losing my money in the stock market,” 21.16% said “I never learned about the stock market or investing, and I don’t know how to get started,” 14.33% said “I am worried about the volatility of the stock market,” and 4.10% said “I don’t trust the financial system.”
Many of these answers and LendEDU’s subsequent data analysis prove that many Millennials have an irrational fear when it comes to the stock market and investing, the company contends. LendEDU ran a Monte Carlo analysis 10,000 times to get the most accurate representation of one’s chances of turning a profit on Wall Street. The analysis showed that individuals have, at the very least, a 98% chance of doubling their cash balance by investing in the market over the long-term. Furthermore, they have a 25% chance of turning $681,512.96 into $8,351,894 by investing.
“Ultimately, if you demonstrate a long-haul commitment to investing your retirement funds in the market, the chances of actually losing money are virtually next-to-nothing,” LendEDU says.
Complete results and the methodology used can be found here.