Wealthfront wants to help millennials take a sabbatical

The latest tool in Wealthfront‘s expanding financial planning utility belt is “Time Off for Travel,” a service that lets the digital adviser’s clients explore the possibility of taking an extended leave from work.

Drawing on information provided by synced outside accounts, Wealthfront’s algorithms estimate how long the individual can afford to travel and project how much the client is likely to spend. Time Off for Travel will also show the impact that a sabbatical will have on other financial goals and provide advice on how to adjust spending and saving habits to afford leaving work for that period.

The tool calculates for clients whether their travel plans are “comfortable,” “manageable,” or “unaffordable.”

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For example, the company estimates a 32-year-old who earns $250,000 a year, with $100,000 saved, and a 20% savings rate, can comfortably afford a two-year trip costing $3,000 a month — assuming they keep the same salary and savings rate after the trip.

Those two years of lost income — and the subsequent loss of years of compounding gains on those savings — definitely comes with a price. Wealthfront estimates this 24-month, $72,000 trip ultimately would reduce this hypothetical client’s net worth at age 65 by $1.1 million, from $8.2 million to $7.1 million. That’s still more than enough to cover her estimated needs in retirement, it concludes.

The tool rules that a trip lasting four years would not be affordable for this client, but that a three-year trip could work if the individual spent another couple years of saving first.

According to a survey of 2,000 Wealthfront clients, the company found taking time off to travel was a top concern for young investors, only less important than “achieving financial freedom” and “retiring comfortably and/or early.”

“The millennial generation is completely blowing up our parents’ definition of ‘The American Dream,’” said Dan Carroll, Wealthfront co-founder, in a statement. “Life is no longer linear and work is no longer 9-to-5. We prefer collecting experiences to collecting assets and retirement is no longer the ultimate goal. It’s not enough to help our clients plan for the traditional milestones like buying a home, having kids and retirement. We need to understand their dreams and use technology to help make them a reality.”

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There’s prudent logic behind a relaxing mid-career break. With longer lives come longer careers and longer retirements —the first so that you can afford the second. But a 40-year career, ending at age 60 or 65, is a very different prospect from a 50-year career ending at 70 or 75.

“It’s just too grueling. We have to take breaks,” said Lynda Gratton, a London Business School professor and co-author of “The 100-Year Life: Living and Working in an Age of Longevity.” “Why wouldn’t you want to take some of the retirement at the end of your life and distribute it to the middle of your life?”

Julie Ford, the founder of Ford Financial Planning, a fee-only financial planning firm focused on urban professionals in their 20s and 30s, said she’s seen an uptick in clients naming sabbaticals or increased travel as a financial goal.

Typically the demand comes from Gen X investors who don’t struggle with the same debt as many millennials, Ms. Ford said. She has never discouraged a client from pursuing a sabbatical, telling clients who can afford it to go for it, while helping others build a plan to get there.

“I also press [clients] on how they’ll spend this time,” Ms. Ford said. “Why do they want a sabbatical? I want them to establish a clear vision and goals around the sabbatical so it’s as purposeful and meaningful as possible.”

The discussion is often more about emotions than finances, and Ms. Ford sees a robo-adviser as being of limited use.

“If they can crunch a helpful number, that’s great, but that alone won’t be enough to encourage a client to make a major life decision,” Ms. Ford said.

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Wealthfront spokeswoman Kate Wauck agreed that major life choices are often emotional and require thinking through other factors, which is why Wealthfront is sharing stories on its blog about Wealthfront clients who successfully took a sabbatical and returned to work. These stories show young investors how their peers thought through those issues, which Ms. Wauck said is more reflective of how millennials make decisions.

“Those advisers are underestimating people’s ability to make decisions about their own lives,” she said.

One such story features Kyle Parrish and his wife, Kate, who returned to San Francisco in November from a 15-month round-the-world trip. They visited 25 countries and every continent except Antarctica. They made friends, and kept costs low by staying with locals, even working on farms in Slovenia and Patagonia. The trip cost $40,000 and required Mr. Parrish to quit a good, if intense, job in sales at Dropbox Inc., the San Francisco-based cloud storage company.

They have no regrets.

“You only have one life,” he told Bloomberg over the phone. “As a human being, you have to stop and refresh.”

When the Parrishes were envisioning their trip, the Wealthfront tool didn’t exist yet, but they spent three years planning and saving. It helped that they already had a good start on retirement savings. In his early 20s, Mr. Parrish began putting as much as possible in his 401(k) plan, accumulating more than $150,000 by the time they left on their adventures. While they traveled, they carefully tracked every expense in a spreadsheet to ensure they didn’t overspend.

A purely digital tool reflects this attitude and allows millennials to plan and budget on their own time rather than schedule a meeting with an adviser. Ms. Wauck said this is something Wealthfront clients value, and the company remains confident its approach will lead the way in capturing millennial assets.

“The power is in your hands to live the life you want to live,” Ms. Wauck said. “We’re not in the business of telling clients how to live, we’re in the business of showing them what’s financially possible.”

For most Americans, a years-long sabbatical is impossible to imagine, at least until they’re older and Medicare and Social Security kick in. Half of working-age Americans are at risk of not having enough income when they retire, according to calculations by Boston College’s Center for Retirement Research based on 2016 data.

That’s up from 30% in 1989. And thanks to the financial crisis, millennials are even further behind than older American workers. The typical American born in the 1980s has 34% less family wealth than earlier generations had at the same age, the Federal Reserve Bank of St. Louis estimates.

Nonetheless, at least some young workers have been able to buck these trends, paying off their student loans and saving early and often. And, for many of these career-obsessed millennials, the ultimate luxury is time.

— Bloomberg News contributed to this story.

Related Topics: Wealthfront Inc.