Home » Investing » Millennials: 1 ETF Is All You Need to Retire Wealthy
BMO Low Volatility Canadian Equity ETF (TSX:ZLB) is a terrific one-stop-shop investment that can help millennials grow their retirement wealth.
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Joey Frenette
Joey Frenette is a journalist, University of British Columbia graduate, ex-engineer, Warren Buffett fanatic, and Fool who's completed CFA Level 1. He’s been investing since 2014 and is always on the hunt for value, regardless of the market "weather." Before writing at The Motley Fool, Joey worked as an analyst/developer at several Canadian small- and mid-cap software firms, including Syscon and Avigilon. Beyond Motley Fool, Joey’s work can be found at TipRanks and MoneyWise Canada. Follow him on Twitter @realJoeFrenette
For young investors like millennials, choosing to invest today rather than letting cash collect dust in low-interest savings accounts can mean the difference between a comfortable retirement and a frugal one. Through the difficult-to-fathom power of long-term tax-free compounding, you may even be able to enjoy a lavish retirement or the freedom to hang up the skates far earlier than 60.
The sooner you start investing, the better. It can transform the retirement pipe dream of many millennials and turn it into an inevitability, even taking into consideration the last two crises that wreaked havoc on the millennial cohort’s pocketbook.
You’ve probably heard that passive investors can do well over the long term by sticking with run-of-the-mill index funds. And you’ve also probably heard from passive-investing enthusiasts that it’s hard to beat the markets consistently over the long term.
Their mantra is, “if you can’t beat them, join them.” While index fund investing may be suitable for certain people, settling for average may not be the best course of action for many millennial Canadians who are capable of getting better-than-average results over prolonged periods by maintaining the proper temperament.
Moreover, the coronavirus crisis has created a volatile market environment where DIY investors are in a spot to separate the good from the bad. Given the massive uncertainties, Mr. Market is likely less efficient at pricing stocks, which means there’s more opportunity for self-guided investors to find securities at discounts to their intrinsic value.
Beating the TSX doesn’t have to be difficult
Beating the TSX Index, which is a poor investment on its own given its lack of proper diversification across sectors, constantly over the long run is possible, especially if you’re one to buy stocks while everybody else is panicking amid a crash. In the heat of the moment, the coronavirus crash in February and March was horrifying. It seemed like stocks would continue tumbling, with no recovery in sight, with the word depression being thrown around in the mainstream financial media. If you held your nose and bought something amid the carnage, you did ridiculously well over the following months, even if you missed the bottom by a wide margin.
As it turned out, the coronavirus crash was one of the best buying opportunities in recent memory. Any attempt to time the bottom, act on emotion or even act based on the economic fundamentals led you to miss out on rapid gains across most overly battered securities. If you were a stock picker, you were also capable of recognizing the difference between securities that were unfairly hit (companies that stood to be minimally impacted by the pandemic) from those that deserved to be hit (companies that were at “ground zero” of the crisis).
One ETF is all you need
Passive investing isn’t all a bad idea at this juncture, though as long as you look beyond the TSX Index to more diversified indices such as the BMO Low Volatility Canadian Equity ETF (TSX:ZLB), which represents consumer discretionaries, utilities, and communication services far better than the TSX Index, which is mostly financials and energy stocks, two of the hardest-hit industries by the coronavirus crisis.
While the low-volatility ETF didn’t live up to its name amid the last crash, I think the one-stop-shop investment is still worth picking up, as volatility is likely to continue for the duration of this pandemic. The ETF also holds some reliable dividend payers that tend to zig when the markets zag, and the management expense ratio (MER) of 0.39% is a low price to pay relative to the better mix of lowly correlated securities and better diversification relative to the likes of the TSX Index.
The ZLB as a play on the return to value
Most importantly, I believe the ZLB is a great play on the return to value. Growth stocks have led the latest upward charge, but once the tides turn, we could witness a growth-to-value rotation that could propel value stocks much higher. If you’re looking for a catch-up trade with lower-volatility value stocks, the ZLB is a great bet, with an overweighting in mature stalwarts, most of which are considered value — not growth — stocks.
By some measures, millennials lag on retirement preparedness and net worth relative to older generations such as Gen X and baby boomers. There are many reasons for this, such as a shift away from pensions toward 401(k) plans and high student debt burdens.
If you can shave off $10 per day in costs, or $300 per month, and regularly invest that into a growth-focused exchange-traded fund (ETF), you can eventually have a portfolio worth more than $1 million.
The Bank of America survey found that 80% of young investors are now looking to alternative investments, such as private equity, commodities, real estate and other tangible assets.
However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.
The average net worth of millennials has surged from $62,758 to $127,793 since the start of the pandemic. Much of this growth is from real estate; as of 2022, more than half of millennials had become homeowners. The average millennial makes between $52,156 and $62,244 per year.
Our survey found that the majority of Gen Zers (54%) and Millennials (52%) have less than $5,000 saved, compared to 42% of Gen X respondents and 29% of Baby Boomers. Unsurprisingly, the oldest generation—Baby Boomers—have amassed the most impressive savings balances.
The fraction of millennials with at least $100,000 in retirement is significantly less than the portion of millennials who have no retirement savings. 42.2% of millennials have no retirement savings while only 10.6% of millennials have at least $100,000 or more. 8.
According to the National Institute of Retirement Security, 66% of working millennials have nothing saved for retirement. Instead, they're busy paying down debt and covering their general living expenses, while saving for retirement is pushed to the bottom of their priority list.
Visit your My NerdWallet Settings page to see all the writers you're following. RDIV and SPYD have some of the highest yields of any high-dividend ETF. It's possible to live off the income from high-dividend ETFs, but it may take some planning.
Holding too many ETFs in your portfolio introduces inefficiencies that in the long term will have a detrimental impact on the risk/reward profile of your portfolio.
For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio. In addition, ETFs tend to have much lower expense ratios compared to actively managed funds, can be more tax-efficient, and offer the option to immediately reinvest dividends.
“As a millennial, if you are investing in your accounts — 401(k), Roth IRA, HSA, investment account — setting up automatic contributions on a monthly or per-paycheck basis, and over time if you are increasing the amount you are adding to those accounts, this allows your wealth to grow for you,” said Darren L.
The average millennial is now entering their "sandwich generation" era and willing to spend lavishly to have more time to themselves. Colleagues and friends said they're spending money on house cleaners, babysitters, elder-care workers, dog walkers, and smart-home features.
Although 9%-13% of all three groups have at least $2,000, it's impossible to ignore the study's biggest revelation. Over half of all Gen Zers and millennials — well over half for the two youngest segments — have less than $500 in their checking accounts.
Yes, it is possible to retire with $1 million at the age of 65. But whether that amount is enough for your own retirement will depend on factors that include your Social Security benefits, your investment strategy and your personal expenses.
The short answer to this question is "Yes". If you've managed to save $300k successfully, there's a good chance you'll be able to retire comfortably, though you will have to make some compromises and consider your plans carefully if you want to make that your final figure.
Will that be enough to meet your spending and lifestyle needs for decades to come? With $5 million under management, the answer is likely yes. You will not live a wealthy lifestyle, but this is more than enough money to generate a very comfortable, indefinite income.
The short answer is yes, $500,000 is enough for many retirees. The question is how that will work out for you. With an income source like Social Security, modes spending, and a bit of good luck, this is feasible.
Introduction: My name is Mrs. Angelic Larkin, I am a cute, charming, funny, determined, inexpensive, joyous, cheerful person who loves writing and wants to share my knowledge and understanding with you.
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