Young & Invested: Can Gen Z and Millennials still build wealth in Australia?
A neurologist’s perspective on how to build slow wealth.
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 30
There seems to be a general despondence amongst young people regarding their future.
Looking through the lens of someone entering university or the workforce, things look pretty grim. Amid geopolitical tension, a prolonged cost of living crisis and general economic uncertainty, they are probably justified in their pessimism.
The notion of the Australian dream: barbecues, beaches and suburban living, now appear to be just that - a dream. This begs the question; can young people still build wealth in Australia? It’s a loaded question and certainly one I’ve pondered on for a while.
Now, there are numerous ways to explore this matter, but to direct my efforts productively, I looked to the experts. Namely, William J. Bernstein, author of If You Can: How Millennials Can Get Rich Slowly. Originally a neurologist, Bernstein took a liking to the investment world and has since produced a collection of personal finance books as well as co-founded a money management firm.
I was drawn to his book after considering how unfavourable the title would have been for sales and marketing. Understandably, few can say they’d prefer a slower path to wealth. Most of us want money and we want it now.
Nevertheless, the world is full of intricate ideas on how to get rich quick and Bernstein’s hopes for the book was to cut through the noise and build on the idea of slow wealth in the modern day.
How millennials can get rich slowly
The financial industry has long sold the image of delivering superior returns through complex strategies that retail investors couldn’t possibly execute alone.
And true, this might be the case for a small portion of institutions on a short-term basis but most fall short. This fear mongering has worked pretty well in the past, but as information becomes increasingly accessible, we know this not to be the case.
Bernstein begins his book on a similar sentiment, by sharing an investment strategy that he claims even a seven-year-old could understand. He suggests starting to save 15% of your salary at 25 years old and putting equal amounts into three different mutual funds:
- A U.S. total stock market index fund
- An international total stock market index fund
- A U.S. total bond market index fund
Since he’s American, he refers to using a 401(k), IRA, or taxable account. In Australia, the equivalent would be contributing through your super or investing via a personal account or a fund platform.
The Australian version would look more like this:
- An Australian total market index fund
- An international total market index fund
- An Australian total bond market index fund
From there he suggests an annual rebalance. The book claims that following this simple recipe throughout your working career will almost certainly beat out most professional investors. A large call, but not one he is alone in.
The three-fund investment strategy was popularised by ‘Bogleheads’, a group of investors following the principles of John Bogle, founder of Vanguard and creator of the first index fund. Bogle was a strong advocate of low cost, diversified index investing for long-term success. I choose to employ a similar investing strategy, however, exclude bond exposure, meaning my allocation to international and Aussie equities is roughly 50/50.
Nest egg or no egg
On a behavioural note, the author quips that without vigour and purpose, young people’s retirement options range between moving in with your kids and sleeping under a bridge in the rain. Whilst I’m a sucker for dark, sarcastic humour, Bernstein isn’t actually far from the truth.
A recent report on retirement outcomes showed that one in five Aussies were entering retirement in poverty. The ASFA Retirement Standard bases its figures on the assumption that people over 65 own their homes outright. But if the ongoing housing crisis isn’t adequately addressed, this assumption may soon become outdated, especially for a generation increasingly being locked out of homeownership. But that’s an article for another day.
The bottom line is that this is serious. It’s easy to get swept up enjoying your youth without thinking about the need for a retirement nest egg. But the choices we make as young people see the difference between going on your second cruise of the year (a riveting prospect at 65 I’d imagine) or moving back in with your kids (if they oblige).
But this isn’t some sort of divine, guaranteed outcome. The author describes five hurdles that young people need to overcome if they are to succeed and retire successfully. I’m not going to detail them all to leave some suspense for the book, but below are points I think worth exploring (and critiquing!).
Spend less money
Rather abruptly – the book states that if you can’t save money, you’ll die poor.
Bernstein describes how youth indulgence in everyday luxuries like the new iPhone, trendy clothing or a vacation can derail people’s spending targets. Nothing groundbreaking here.
He goes on to assert that even smaller, seemingly innocent expenditures like a daily latte, entertainment subscriptions, or a few unnecessary restaurant meals can have an impact.
The guide is filled with commonplace suggestions like getting a roommate for a while so you’re not living on cat food at 70 years old. Of course, he also advises that paying down bad debt like credit cards or a car loan takes priority, given the interest you generally pay on debt.
He estimates if you start at 25 and want to retire at 65, you need to put away at least 15% of your salary. And with an assumption of 5% nominal returns and long-term inflation around 2%, we should have enough to retire.
A few critiques
One of the core assumptions Bernstein (and many from older generations) makes is that young people are failing to build wealth due to excessive spending. The frustration with this narrative stems from the fact that the disadvantage runs far deeper than cutting back on soy lattes and finding roommates.
The book states that increasing your savings amount with inflation as ‘not that difficult’, given we can expect salary to increase by at least that rate. But this assumption doesn’t consistently hold up.
Wage growth in Australia has lagged inflation over the past few years, resulting in negative real wage growth for an extended period. This means that many of us have seen purchasing power decline as costs continue to rise.
Source: ABS data. Author visualisation.
Recent analysis done on average household spending revealed that young Australians have already been pulling back on recreational spending to cover costs like mortgage repayments, rent and other essential expenses, while older Australians are enjoying more travel and dining out.
This isn’t surprising - it makes logical sense. It also refutes the notion that savings are being forgone in place of lifestyle indulgences.
As for Bernstein’s recommended 15% savings rate, luckily in Australia we have compulsory super contributions to do some of the heavy lifting for us. On a post-tax basis, employer contributions come to just over 10% of income going towards retirement.
It’s easy to assume that the mandated minimum is sufficient, but this may not always be the case. In a recent article on the rate contribution to super, Mark estimates that it would take contributions of ~16% to reach the optimal 70% income replacement at a 4% withdrawal rate.
As I discussed above, the recent pressure on households has made it difficult to consistently max out investments. Not everyone will have the capacity to contribute beyond the mandated minimum. It’s important to assess your financial situation to determine your capacity to make additional contributions, as they will often involve the sacrifice of other financial goals.
Is social media driving your money dysmorphia?
Bernstein references The Millionaire Next Door by Thomas J. Stanley and William D. Danko as the most important book you’ll ever read, for its dissection on the effects of a consumer-orientated society.
Stanley and Danko found that a plumber making $100,000 per year was more likely to be a millionaire than an attorney with the same income. This was because the latter’s peer group was much harder to keep up with.
Whilst keeping up with the Joneses is hardly a new phenomenon, it has been further exacerbated in recent years by social media and the proliferation of absurd displays of wealth.
A recent Finder survey revealed that the average Aussie wouldn’t feel ‘rich’ unless they earnt around $350,000 per year. Interestingly, the reported figure was much higher for Gen Z ($392,000) and Millennial ($418,000) respondents.
There are likely various factors driving these survey outcomes, however an important link to be made is that Gen Z and Millennials are also the largest consumers of social media, therefore indicating it could be leading to a sort of money dysmorphia, or warped perception of relative wealth.
This distortion can have several impacts on the way we invest. We see that younger investors tend to be more speculative and chase higher-risk investments, possibly striving towards perceptions of wealth they consume on social media.
The analogy of the plumber vs the attorney exemplifies how our environment affects the way we invest. Wealth can be built through discipline, frugality and consistent investing, rather than simply relying on a higher income (although this certainly does help).
The biggest enemy is us
Consistent readers of this column already know this to be true.
Bernstein draws us back to consider the basics of human evolution. In our historic state, the largest risk to existence was attacks from predators and other humans. Our ability to react instinctively and with speed carried real survival value.
Now we dial it forward to present day. Technology has increased our survival prospects, our health and longevity have thus improved, shifting the focus to long-term decision making - a pre-disposition that he argues humans are not endowed with.
The instant emotional reflexes that once served us so well, now manifest as a detriment to our investing abilities and decision-making skills. This is evident when we examine how investors respond to market volatility.
Take this April for example, the tariff-induced sell-off resembled how I’d imagine our prehistoric ancestors reacted when stumbling across an apex predator in the wild: panic, immediate flight and little long-term planning.
Concluding thoughts
Australia is fraught with its own idiosyncrasies that create barriers for young people trying to build wealth. From ever-increasing property prices and recently stagnant wage growth, our wealth landscape can feel like an obstacle course, rather than a level playing field.
I acknowledge that this article doesn’t provide a definitive answer or even a dose of much-needed optimism. Instead, I hope that it has left you with some food for thought. I don’t know if there is a single book or strategy that will work for everyone. The best thing you can do is absorb the insights that resonate with you and your goals and build a framework based on that.
On the topic of personal finance publications, my colleagues Mark LaMonica and Shani Jayamanne have co-authored their own book, Investing Your Way, which serves as a guide to successful investing, with actionable insights and practical applications.
You can pre-order a copy on Amazon or at Booktopia today.
