To the joy of many investors, the S&P 500 is up by 11% in 2017.

However, according to new research by LendEDU, many millennials may be missing out on these gains.

LendEDU’s research found that 41% of millennials are avoiding the stock market and are instead using savings accounts to save for retirement. We estimate that avoiding the stock market will cause millennials to miss out on over $3.46 million by retirement at age 65.



Our analysis compared the expected performance of the following scenarios:

Fully invested in a stock portfolio.

Fully invested in a traditional savings account.

Fully invested in cash.

Our estimates were calculated using the past 40 years of market performance and historical economic data. We ran a Monte Carlo analysis with 10,000 possible outcomes as a way to record the full range of scenarios. Annual savings were calculated as 20% of the given year’s salary following the 50/30/20 rule of thumb (50% necessity, 30% discretionary, 20% savings). $40, 352 was used as the starting salary, which was determined by annualizing the median weekly earnings of 25-34-year-olds as provided by The Bureau of Labor Statistics. The starting salary was then increased year over year by 3.7% to adjust for inflation. For a very detailed explanation of our calculations please see our methodology.

We started our research by asking millennials to best describe the way that they are saving for retirement. We found that 41% of our respondents are using a savings account as the primary way to save for retirement. We surveyed 502 respondents who had been pre-screened as individuals who are, in fact, saving money for retirement. Moreover, we used age filters to identify millennial respondents. Our average respondent was 27 years old.



Key Findings

Stock market investing is the obvious choice: Financial markets can be volatile during the short term. However, over a long 38-year time period (note: the time to retirement for our average respondent) the stock market is confidently the best path of saving for retirement. In our research, we found that the respondents should expect to accumulate an account valued at $4.95 million at retirement, after fees.

Savings accounts won’t keep pace: Do you remember your first savings account? According to our research, many millennials are currently using savings accounts as their primary way of saving for retirement. Over a long 38-year time period, we found that respondents who use a savings account to save for retirement will fall short. Our research found that these respondents will accumulate an account valued at $1.49 million at retirement. As stated above, our research shows that millennials who use savings accounts to save for retirement will fall short by about $3.46 million over 38 years. Please note, 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.

​Cash is not king: As an extreme illustration, we ran the same analysis assuming that our respondent kept their retirement savings in cash, or a non-interest bearing account. After 38-years, we found that these 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.

By the end of the analyzed time period, the compounding effect has a dramatic impact on the missed earnings potential calculations performed above.

Why Are Millennials Not Investing In the Stock Market?

When LendEDU asked 500 millennials that considered themselves to be currently saving for retirement, 40.60% said that they were saving for retirement by using a savings account. Meanwhile, 59.40% said they were saving for retirement via an investment account like an IRA, 401 (k), mutual fund, or an individual brokerage account.

Throughout this study, we have pointed to our data analysis that reinforces the belief that saving for retirement through an investment portfolio is the best way to make as much money as possible. In fact, after we ran a Monte Carlo analysis 10,000 times to see the likely returns on saving via investing, we found that you have a 98% chance of at least doubling your savings through investing in the market.

Furthermore, if you have save for retirement through an investment portfolio, you have a 25% chance of making $8,351,895, or way more than if you were saving via savings account or stashing cash under your mattress.

Finally, we found that it was less than 75% likely that savings account returns would double the value of your assets, and it was less than 1% likely that you would triple the total value of your assets by using a savings account.

LendEDU wanted to find out why more millennials are not saving for retirement through an investment fund. The following poll questions helped us move towards a conclusion:

1. Would you say that the 2007-2008 Financial Crisis has kept you from investing your retirement in the stock market?

52.30% said “Yes, the 2007-2008 Financial Crisis has kept me from investing my retirement in the stock market.”

46.80% said “No, the 2007-2008 Financial Crisis has not kept me from investing my retirement in the stock market.”

2. Which of the following best describes your feelings about investing in the stock market?

58.60% said “I would consider myself to be afriad of the stock market.”

41.40% said “I would consider myself to be a confident investor in the stock market.”

3. (Asked only to those who said they were afraid of the stock market) Which of the following best describes your answer to the previous question?

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.”

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. First, the 2007-2008 Financial Crisis should not keep millennials from investing their retirement funds in the market. Yes, many people lost a lot of money during those downtrodden times, but the market has historically bounced back and as long as you demonstrate patience, you will be rewarded many times over.

​Second, 58.60% of millennials should not be afraid of the stock market. Can it be overwhelming? Yes. This is a very natural feeling, especially for individuals investing for the first time. But by diversifying yourself across a number of assets you can work to limit your volatility and risk.

If you do not know where to get started, get help through relatives, financial advisors, or even robo-advisors. (You can also check out our how to start investing guide.) As our analysis shows, the ability to make serious money via investing is too great and the likelihood is too high that nobody should ever let fear get in the way.

Third and finally, 60.41% of millennials that are afraid of investing are scared because they are worried about losing their money in the stock market. 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 you have, at the very least, a 98% chance of doubling your cash balance by investing in the market. Furthermore, you have 25% chance of turning $681,512.96 into $8,351,894 by investing; those odds should be taken every time! 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.

Methodology

Before we dive into the specific calculations that were done for this study, it is important to first explain the poll that coincided with the financial analysis. LendEDU commissioned the poll to be conducted online by online polling company Pollfish. In total, 502 American respondents between the ages of 18 and 34 participated in the LendEDU poll. Pollfish’s age filtering tool was used to ensure that all respondents were between the ages of 18 and 34, or the millennial population. A screener question was also utilized so that all respondents were saving for retirement in some manner. Potential respondents were asked the following: “Which of the following best describes your current financial situation?” The following answer was the only one that was accepted: “I would consider myself to be currently saving money for retirement.” Any respondents that chose this response were than directed to complete the rest of the poll.

The average age of this survey’s participants was 27 years old. A common and traditional retirement age for American workers is 65 years old. These calculations were meant to display the likely differences in wealth that a 27-year-old saving for retirement today would recognize in 38 years depending on his chosen method of saving. All historical averages, standard deviations and rates were calculated based on the 40-year period from the close of 1976 to the close of 2016.

The starting salary of the hypothetical saver was $40,352, which was determined by annualizing the median weekly earnings of 25-34-year-olds as provided by The Bureau of Labor Statistics. The salary was then increased year over year by 3.7% to adjust for inflation in accordance with the average consumer price index data for the time period studied. Annual savings were calculated as 20% of the given year’s salary following the 50/30/20 rule of thumb (50% necessity, 30% discretionary, 20% savings).

Nominal investment returns were calculated by taking the geometric mean of annual S&P 500 returns over the 40-year period accounting for reinvestment of dividends. Fees of 0.70% were subtracted annually from investment returns in accordance with an average mutual fund expense ratio reported by the Investment Company Institute. 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.

In order to correctly compare resulting wealth balances at the end of the 38-year period, we had to determine growth rates for the different saving methods.

The resulting cash balance was determined by calculating out, over 38 years, the accumulated savings of a 27-year-old with a starting salary of $40,352. This person would consistently save 20% of his income per year in the form of cash while continually experiencing a 3.7% annual increase in salary due to inflation. The resulting cash balance at the time of retirement would be $681,512.96.

The ending savings account balance was determined by using the same contribution method as previously mentioned, but also factoring in interest returns. Calculating the geometric mean of U.S. 3-Month Treasury Bonds over the past 40 years resulted in an average of 4.61% annual growth before inflation. By the time the 27-year-old retired at age 65, the savings account balance would equal about $1.49 million.

The investment portfolio balance was found by using the same contribution method as before, but also by calculating the geometric mean of S&P 500 returns over the last 40 years and applying it as annual growth. This calculation resulted in an average increase of 10.96% per year before inflation. After compounding, the resulting portfolio balance would total about $4.95 million.

In addition to applying historical mean returns to determine the investment portfolio balance, we also conducted a Monte Carlo Analysis. In this model, we simulated potential returns over the 38-year investment period. The mean and standard deviation inputs were based on S&P 500 performance from the close of 1976 to the close of 2016. The simulation produced 10,000 potential outcomes. A 27-year-old investing today can reasonably expect, with the stated levels of confidence, the following retirement portfolio balances after deduction of fees:

95% likely to have at least $1.85 million

75% likely to have at least $3.38 million

50% likely to have at least $5.27 million

25% likely to have at least $8.35 million

99.98% likely to at least retain the original investment

A Monte Carlo Analysis was also conducted to find 10,000 potential savings account balances at the point of retirement based on historical 3-Month Treasury Bond returns. The results concluded that savers were less than 1% likely to triple their total contribution over the 38-year period and less than 75% likely to double it if they relied fully on the savings account approach.

See more of LendEDU’s Research