Let’s talk about money: Young adults and investing for the future

Two men seated at a table have a discussion.

These talking points can help set up a meaningful conversation that will help them better understand investing.

As a parent with adult children, you might have concerns about their lack of experience with, and knowledge about investing.  You can help demystify investing and establish the knowledge to guide them toward a better financial future.

Many parents talk to their children about budgeting and saving but forget to discuss investing, says Dan Prebish, Director of Life Event Services for Wells Fargo Advisors. Here, he shares some key talking points for parents and grandparents who want to encourage setting priorities, diversifying, saving for retirement, and other key components of investing for the future.

Point No. 1: Start investing for retirement early

To a young person, retirement may seem too far in the future to comprehend. That’s why Prebish says it’s important to reinforce that now—meaning while they are young—is actually the best time to invest for retirement. Younger investors have more time to take advantage of the potential for compounding: As the dollars invested earn returns, those returns may earn returns, and so on—year after year. The sooner you start investing, the more time your money has the potential to grow to help you reach your retirement savings goal.

Point No. 2: Participate in a workplace retirement plan

Encourage your child or grandchild to participate in a 401(k) or other employer-sponsored retirement plan if offered. Because funds are deducted from each paycheck before an employee receives their take-home pay, workplace plans add an element of discipline, Prebish says. It’s more difficult to spend what you can’t access easily. If the employer offers a matching contribution, advise your young adult to contribute at least enough to get the full match. “You don’t want them to miss the opportunity to get free money,” Prebish says.

Roth IRAs are also worth a closer look for younger investors who meet the income qualifications. Roth IRAs don’t offer the possibility of an upfront tax break that traditional IRAs provide. But the Roth IRA account owner won’t owe taxes on any earnings or on qualified distributions either. For younger investors, that means the potential for decades of tax-free growth and then tax-free income during retirement. (Learn more about traditional IRAs versus Roth IRAs.)

Point No. 3: Stay focused on the long term

Prebish says you should emphasize the importance of sticking with a disciplined investment plan, especially during instances of market volatility such as we’ve seen during the coronavirus pandemic. If your young adult sells all stocks and then waits until the market improves before buying again, they could miss several years’ worth of good returns on their investments.

You may want to consider sharing your own stories of weathering tough markets so they can better relate. “A parent or grandparent who has lived through the stagflation of the ‘70s, the stock market crash of 1987, or the 2008 recession may offer a helpful perspective,” Prebish says.

Point No. 4: Diversify to help manage risk

Talk to your child or grandchild about investing in a diversified portfolio. Diversification is a strategy to help reduce investment risk—by spreading your investments among different kinds of asset classes (stocks, bonds, and cash), regions (such as choosing U.S. and international investments), company sizes, or industries.

If one type of asset loses its value, the others might grow to offset that loss. “That tends to smooth out returns so you don’t have as bumpy a ride,” Prebish says.

Point No. 5: Choose a trusted advisor

An experienced financial advisor can help your adult child or grandchild establish short-term and long-term goals and build a plan to help them work toward those goals, Prebish says. If your young adult’s finances aren’t yet complex enough to merit needing their own financial advisor, your financial advisor can explain the different ways that Wells Fargo Advisors can assist them towards reaching their financial goals.

Wells Fargo Advisors and its affiliates do not provide tax or legal advice. Please consult with your tax and/or legal advisors before taking any action that may have tax and/or legal consequences.