“Millennials, and younger people in general, is that they crave flexibility,” Boyles says. “They simply don’t spend as much time at jobs or in any one place as older generations, they’re more inclined to shift jobs or move.”
The advantages of 401(k) plans simply don’t appeal to younger millennials, Boyles says, noting they usually don’t have incomes high enough to need the tax benefits, they rarely stay in a job long enough to guarantee their employer match, and they’re not able to save enough on an annual basis to need the 401(k)’s high contribution limits.
Boyles believes that millennials are already turning towards Roth IRAs as their savings vehicle of choice, citing recent research from the Investment Company Institute.
“The ICI recently put something out that said among the 4 million to 5 million IRAs they’re tracking, 20 percent are owned by millennials,” Boyles says. “They’re creating the flexibility on their own to use the money as they need to and to invest in whatever funds and products they want.”
Boyles says that millennials should be encouraged to open up Roth IRA accounts after they graduate from college in their early 20s. After a five year period, any earnings on money deposited in the IRA could be withdrawn.
“After five years, at the age of 25 or 27, if they need the money for something like a first time home purchase or for a rainy day, the earnings can come out tax-free,” Boyles says. “The earnings are incredibly mobile, the money is always accessible, and they can use it whenever they want to. It’s not unlike 529s where families save for education in a non-tax deferred vehicle, except a Roth has fewer limitations.”
As their income rises and their wanderlust subsides with age, millennials could then be encouraged to participate in a 401(k) plan and focus more directly on qualified retirement savings to keep their tax burdens low, Boyles says.
The ‘rainy day Roth’ concept wouldn’t be as appropriate for high-net worth or high income clients, says Boyles, and brings with it the risk that millennials would begin to use the account for discretionary expenses.
“You’re gambling on their mindset,” Boyles says. “You’re hoping that they’re going to be careful about how they use these accounts. There’s always a certain population that is going to see that Roth IRA as their spending money. This is a short-term solution that carries the risk that millennials will borrow from their future.”
Thus, if advisors choose to offer a ‘rainy day Roth’ to young clients, they should also emphasize the benefits of the 401(k), Boyles says.