The Pew survey is one of the more comprehensive and wide-ranging studies of Millennials yet published since the Global Financial Crisis. Here are some of the highlights:

• Diversity. Millennials are more ethnically and racially diverse than older adults, and they are more comfortable with that diversity. They are more open to inter-racial dating, gay marriage and non-traditional family arrangements, especially out of wedlock-births. Of all generations, they are the most likely to self-identify as liberal.

• Technology. Millennials whole-heartedly embrace technology. Three-quarters have created a profile on a social networking site. One in five have posted a video of themselves online. Twenty-four percent cite their use of technology as their most distinctive generational trait, double the number of Generation Xers who do. How addicted are Millennials to their technology? Eighty-three percent say they sleep next to their cell phone!

• Self mutilation. (OK, that’s the value-laden judgment of a Boomer parent whose 23-year-old daughter has nose piercings. Perhaps we should use the term “self expression.”) Nearly four in ten have a tattoo (and one in five of those have six or more tattoos). Nearly one in four have piercings somewhere other than an earlobe (six time the rate of older adults). Pew did not ask how many wear pink, spiky hair.

• Family values. Fifty-two percent of Millennials list “being a good parent” as one of the most important things in their lives and  30% say “having a successful marriage,” far more than say they want to make lots of money or be famous. They’re just not in any hurry to commit.  Only one in five are married, less than half the number of their parents at the same age. On the other hand, one third of Millennial women with children are unmarried. Interestingly, three in five agree that more single women having children is not a good thing for society.

• Generation gap. Millennials get along well with their parents, reporting having had fewer spats with them than older adults say they had. They also respect their elders, acknowledging that older generations have a superior work ethic and more moral values. Perhaps not coincidentally, one in eight over the age of 22 say they have “boomeranged” back home to live with mom and dad.

What it means for financial advisors. The Pew study fleshes out the generational portrait we have of Millennials based on previous studies we have cited regarding their attitudes toward technology and finances.  If you or your firm is targeting this large and fast-rising generation, you would be well advised to read, learn and inwardly digest.

“This is a formative period for financial institutions to establish strong relationships with Gen Y,” said Geoff Knapp, vice president, Online Banking and Consumer Insights, “and the survey reinforces how important it is for institutions to deliver accessible banking services that will satisfy these consumers’ comprehensive needs.”

Millennials are more likely to sign up for new accounts and services online than at bricks-and-mortar locations. Nearly half with credit cards signed up for them online; more than one third applied for personal loans online.

More Millennials also use their wireless phones as a tool for managing their finances: One third conducted mobile banking activities in the past month compared to only 11 percent of Boomers who did. The most common financial activity is checking account balances. Fifteen percent said they plan to receive and pay bill via their mobile devices in the future.

Exploring attitudes toward credit and debt, Fiserv found that Millennials conduct more debit card transactions (14.1 per month) than the average household and fewer credit card transactions (5.3 per month). “This potential reflects a trend toward fiscal responsibility among young adults, as many had never been in debt and expressed an emphatic desire to avoid future debt,” said the Fiserv summary. “Others cited negative experiences managing credit card debt, leading to a desire to minimize card use.”

In sum, the Fiserv study drives home what appear to two defining generational traits among Millennials: They are at ease with electronic transactions and communications, and they have an aversion to debt.

What it means to financial advisors. Banks aren’t the only financial institutions that need to think about how they interact with Millennials. Financial advisors accustomed to dealing with Silent Generation and Boomer clients may have difficulty adapting to the Facebook generation. Young adults are inseparable from their cell phones. They “text” messages to one another, and they routinely share photos by phone. These modes of social interaction carry over to their financial interactions.

Do not assume that communications techniques that work with older generations — snail mail, telephone calls, face-to-face meetings — will appeal to Millennials. What will work? We wish we knew. We’re Boomers. Our children laugh at us and say we’re clueless. We don’t necessarily advise you to start texting and twittering, but we do suspect that you’ll need a strong digital component to your outreach program. We will stay attuned to this issue and let you know as we learn more.

Healthcare inflation has outpaced increases in the Consumer Price Index by a wide margin for years. The trend is especially alarming for seniors for whom health care comprises a much larger expenditure than for younger, healthier generations but whose Social Security and pension benefits are tied to the CPI.

In 2009 total consumer spending per person in the United States was roughly $26,000, of which $6,000 went to health care. While consumer expenditures are expected to increase in the future, healthcare is expected to claim the lion’s share of that growth. According to a recent Congressional Budget Office analysis, spending per person in 2035 is projected to increase by more than $14,000 inflation-adjusted dollars. Sounds great. Unless you stop to consider that more than 80% of that increase will go to health care. Put another way, spending on health care will triple, while spending on all other goods and services will grow by just 14%.

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For more than a century, each generation of senior Americans has lived longer and enjoyed fewer disabilities. That trend appears to be reversing itself with the Boomer population. Obesity is epidemic among Boomers, curtailing mobility, increasing dependency and aggravating a raft of chronic diseases from heart attack to diabetes. A study published in 2009 by the American Journal of Public Health found that Americans 80 and older suffer fewer disabilities than previous generations at the same age. Among Americans in their 70s (Silent Generation), there is no change. And among Americans in their 60s (Silent Gens and Boomers), disability rates are 40% to 70% higher.

“Our results have significant and sobering implications,” wrote lead author Teresa E. Seeman and her colleagues. “To the extent that persons currently aged 60 to 69 years are harbingers of likely disability trends for the massive baby-boomer generation, the health care and assistance needs of disabled older Americans could, in the not-so-distant future, impose heavy burdens on families and society.”

What it means to financial advisors. As a trusted advisor, you need to draw the connection between your clients’ medical health and their financial health. Their long-term financial plans need to incorporate realistic assumptions about how much Medicare and Medicare supplemental insurance will cost them, how those costs will rise over time, and how much they will have to spend out of pocket if they suffer from chronic conditions or encounter the need for acute care, like coronary bypass surgery.

If your clients don’t think they will have enough to cover their medical costs and maintain their living standard, then share our friend’s advice: Save money by keeping healthy. The message should resonate among Boomers, who share a generational trait of wanting to stay in control. Boomers can’t control what happens to Medicare expenses, but they can control what they eat and how much exercise they get.

With the world awash in capital, interest rates plunged globally, borrowing became cheaper and financial institutions relaxed lending standards. The Asian financial crisis of 1997, the stock market spike in 2000 and the real estate bubble of the early 2000s were the consequence of excess savings and the inability of the global financial system to allocate it efficiently.

Boomers may appreciate being absolved of alleged past sins, but the future that awaits them is none too encouraging. As the Boomers enter retirement and begin drawing down savings, and as governments increase their borrowing to fund pension and medical programs, the world will begin to experience capital scarcity and rising interest rates. Investors, already spooked by the questionable ability of Greece and other European countries to pay their sovereign debt, could demand higher rates to compensate for the increased risk of default by all governments groaning under the burden of aging populations. Indeed, according to Bond’s economic models, interest rates on long-term government bonds in the United States and the United Kingdom could double by 2020.

Surging interest rates, if they occur, could not come at a worse time for retiring Boomers. It is standard practice to shift portfolio allocations from stocks to bonds in order to reduce volatility of principle and income. That strategy paid off beautifully in the 2000s, a period in which bonds out-performed stocks by a wide margin. But if Bond’s demographics-driven models are correct, total return on bonds (interest plus capital appreciation) could be mildly negative in the decade ahead.

“It is likely that this phase represents a high-water mark, to be followed by an inexorable turn in the demographic tide,” sums up Bond. “Over the next two decades, the boomer generation will age into retirement and run down their accumulated savings. An era of capital abundance will gradually turn into a capital scarcity. … Government bond yields are likely to require a significant rise in risk premia to cover the eventuality of default, either outright or through inflation.”

What it means for financial advisors. Your Boomer clients are driving global capital flows through their vast numbers and their passage from middle age, a period of peak savings, to retirement, a stage of dis-saving. Your job as trusted advisor is to explain how these long-term demographic and financial cycles will impact them as individuals. Be cautious about dispensing the conventional advice that clients nearing retirement should shift assets to more “conservative” investments like bonds.

We urge you to read the Barclays Capital study, which makes a much more powerful case than we can in this synopsis. Unfortunately, Barclays makes the study available only to clients (and to journalists), so no more than this brief summary is accessible on the Internet. But if you happen to have a friend, who knows a guy… do try to get a copy.

Spending our Children's Inheritance

Generational tensions have come under the spotlight in the United Kingdom with the publication of a new book, “The Pinch: How the Baby Boomers Took their Children’s Future – And Why they Should Give it Back,” by Conservative Party parliamentarian David Willetts. His thesis in a nutshell is that Britain’s Boomers, who now run the country, have fashioned the nation’s housing, healthcare and financial institutions to meet their needs — at the expense of younger generations.

Britain’s youth has been frozen out of the job and housing markets, creating a new sociological category, the “Yuckies,” an acronym for Young Unwittingly Costly Kids (comparable to America’s boomerang babies), twenty-somethings who live at home or are otherwise financially tethered to their parents. In an odd reversal of fortune, Boomer parents now find themselves dipping into their wealth, amassed at the expense of younger generations, to help their children make ends meet. Recent surveys have found that Yuckie parents have drained as much as a fifth of their savings and that one third have remortgaged their homes. (Bryony Gordon, a Yuckie, takes a light-hearted look at the issue in the UK’s Telegraph.)

Another UK neologism for boomerang kids is Kipper, derived from Kids in Parents’ Pockets Eroding Retirement Savings. It seems that many Brit parents, whether through Boomer self indulgence or a sense that they’ve already given their children plenty, have decided that if they can’t take their money with them, they might as well spend it. Thus, merry olde England has given rise to another social phenomenon, for which it borrowed an American expression, Spending my Kids’ Inheritance, that has led to yet another acronym, SKI. Parents go SKIing — as in spending down their estate, whether on the slopes of Gstaad or the beaches of the Balaeric Islands.

The SKIing phenomenon, it appears, has migrated to Canada, where a columnist in the Financial Post espies a “massive cultural shift.” 

Waking up to the fact that they have saved insufficient funds to both enjoy their retirement and leave an inheritance to the kids, many Canadian Boomers are deciding to just enjoy their retirement. “The pressure on Baby Boomers to leave behind a big estate is now zero,” the column quotes a Canadian Boomer expert as saying.  “All our previous beliefs about pensions and inheritance are fading away.”

The trends in Britain are mirrored throughout the English-speaking world, including Canada, Australia and the U.S., all of which experienced massive baby boom following World War II. Although these issues have not yet come to dominate the public discourse in the U.S. in the same way as they have in the U.K., we are experiencing similar attitudinal shifts here. (See “Tough Luck, Junior“  and “Boomers, Inheritances and Legacies.”)

What it means to financial advisors. Boomers are rewriting the rules of retirement. They’re prepared to work longer than their parents did. They are more willing to make financial sacrifices to help their children. But whatever they plan to give their children, they don’t see any sense in waiting until they’re dead to it. Boomers are expecting to live a lot longer, which means their children will be older when they stand to inherit. As one of the experts quoted in the Financial Mail said, “There’s no reason to leave an estate. What are you gonna leave for a 60-year-old?”

Financial advisors need to pay attention: Many Boomers are re-thinking their parents’ ideas about intergenerational stewardship. Attitudes are in flux. Assume nothing. Listen carefully to what your clients are saying, and help them plan accordingly.

Traditionally, the answer has been, “Of course.” Of the two great elderly entitlements, Social Security and Medicare, Social Security is regarded as the good program, on a relatively sound financial footing. Admittedly, in a few years the program will begin paying out in benefits more than it brings in from FICA revenues and interest on its trust fund bonds, but the $2.5 trillion in the Social Security trust fund should last us until 2037, the optimists say. That is plenty of time for politicians in Washington, D.C., to devise a permanent fix based on some combination of slightly higher taxes and modest benefit cuts.

We expect that financial advisors will be hearing more questions about Social Security. You can refer clients to the Social Security website for information (good luck finding anything but the company line) or you can share a recent article written by Greg Burns in the Chicago Tribune, “10 Things You Need to Know about Social Security.” This article does as good a job as we’ve seen of succinctly explaining the complex issues swirling around the retirement program. Yes, the program has problems, Burns concludes, but “[as] troubling as it is, it’s not as bad as it could be.”

But if you decide to share the article, urge clients to read the comments below the article submitted by one Allen W. Smith, a professor of economics at Eastern Illinois University. Smith adds two more things that Americans ought to know:

First, Americans have no legal entitlement to Social Security benefits at statutorily promised levels. The Supreme Court ruled a half century ago that no one has a “contractual earned right” to Social Security akin to a pensioner’s contractual right to his or her pension. Social Security is a political entitlement, not a legal one. While Congress has continually expanded benefits during 65 years of post-World War II prosperity, it can just as easily backtrack if times get tough.

Second, the Social Security “trust fund” has no assets other than Treasury notes, which the U.S. government promises to repay when Social Security needs the money. However, as the Social Security trustees say deep in their 2009 report:

“Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”

Go back and read the phrase we put in italics. With U.S. government operations projected to run $1 trillion or bigger budget deficits every year more or less forever, do your own math as to how long Congress will be able to continue honoring the Social Security debt.

What it means to financial advisors. We believe that financial advisors can win the trust of clients by acting as dispassionate sources of information about Social Security, the foundation of nearly every American’s retirement plan. You don’t need to frighten your clients. Just give them the facts — your clients will find those scary enough. Then invite them to talk about the risk of relying upon Social Security income and what they can do to protect themselves.

The Montoyas enjoying simple pleasures in their back yard. Photo Credit: New York Times.

Does America’s new-found thrift reflect a fundamental change in values, or is it a case of rationalizing a frugality imposed by banks and other lending institutions as they tighten lending standards like they do in every recession? The debate continues.

Making the case for a genuine shift in values, the New York Times weighed in recently with an article about how Americans are buying less but doing more. The story leads with an anecdote about the members of the Montoya family of Miami, Fla., that used to buy whatever they wanted — sneakers, Legos,a  laptop — for themselves and their children. But, now that the recession has slashed their income, they are cutting their cash expenditures. Instead of seeking satisfaction through acquiring stuff, they are seeking satisfaction through experiences — like paddling an old canoe through the waters of Biscayne Bay.

A New York Times/CBS News poll found that more Americans are spending time with family and friends, gardening, cooking, reading, watching television and engaging in other hobbies. Likewise, a Department of Labor time-use survey shows that as early in the recession as 2008, Americans began spending less of their time than they had in 2005 buying goods and services, and more time cooking or taking part in organizational, civic and religious activities.

Psychologists say that sharing experiences with friends and family is ultimately more rewarding than buying more possessions, which soon loses their luster and are soon forgotten. If so, then rediscovering the virtue accumulation experiences over accumulating stuff may prove to be an enduring cultural shift.

But some are still skeptical. In a commentary on the Vanguard blog, Steve Utkus thinks that higher savings rates do represent a permanent change in the nation’s favorite past-time of recreational therapy — but not because the Global Financial Crisis administered shock treatment on the American psyche. It’s because the crisis administered shock treatment to the financial institutions that engendered the high-debt culture. Writes Utkus:

Here’s my hypothesis: The steady decline in American savings rates over the past quarter-century was largely due to growing access to easy credit. It was a structural or institutional shift, not a behavioral one. Americans in the 1950s, who saved at a much higher rate than Americans today, were not somehow morally superior in their fortitude or self-discipline. Rather (in my view) they just couldn’t say “charge it” every time a new consumer product caught their eyes. …

Now, with tightening credit standards, Americans actually have to save money to buy things — they need cash to buy a car or new appliances or a home. Hence the rise in savings. From this point of view, many of the recent complaints about availability of credit have a silver lining. They will encourage those Americans who are over reliant on debt to consider saving for the future, rather than borrowing from it.

What it means for financial advisors: Utkus is probably right about one thing: Tighter credit standards by lending institutions have played a key role in dampening consumer spending. But “not going into debt” is not the same as actively saving for long-term goals. Undoubtedly some Americans will return to their wastrel ways when the money spigot turns back on, but we think that most Americans are delighted to discover what life has to offer outside the malls and shopping centers and will not abandon their insight so readily. As people get older, they are more inclined to embrace spiritual and non-material values anyway. The aging of the population will reinforce the shift in values.

Because the evidence is ambiguous, don’t assume anything about your clients’ change in values. But be attuned to the possibility that they are undergoing through profound changes in what they want out of life. Question. Listen. And, if appropriate, suggest that they re-think their long-range financial planning.