Every generation faces their own unique set of challenges. Timing plays a major role in the outcome of your financial life, whether you like it or not. In fact, a 2018 report by the Federal Reserve Bank of St. Louis explained this clearly. Their study looked at the connection between one’s birth year and financial well-being, or wealth.
About 48,000 families were documented and categorized into six groups by their birth decade--from the 1930s to 1980s. I was born in 1987 and belong to the 1980s cohort. The Great Recession affected all generations, but it’s possible that my age group was hurt the most. As you will see in the study’s findings, the odds for long-term financial wealth are currently stacked against the 1980s group. However, there are still reasons to be optimistic.
First, get to know the typical 35-year old family today. They were born in 1984 and attempted to enter the workforce at the start of the Great Recession. This 1980s cohort is the most educated group to date, which also brings record levels of student loan debt. As the report states, “the typical 1980s family also had higher debt in relation to both income and assets than any previous generation at the same ages, creating headwinds to wealth accumulation and risks to financial stability when setbacks occur.” As we graduated college in the midst of a recession, we started our careers by finding any entry level job available in order to make student loan payments. All the while putting off the prospect of home ownership.
Second, understand the challenges the 1980s cohort have faced over the previous decade. The greatest driver of a family’s wealth is income. The higher your income, the greater chance you have to increase your wealth over the long-term. You are able to pay off student loan debt, purchase a home, and save for a future retirement. With lower incomes and a lack of assets, my group has simply missed out on the rapid appreciation of stocks and real estate since the Great Recession ended. With lower expected returns in the future, we will be playing catch-up for years to come.
Lastly, compare the 1980s group to previous decades. The cohorts that recovered from the Great Recession the most were born in the 1930s to 1950s. Quite simply, these groups have assets and lower levels of debt. Thus, allowing their wealth to bounce back over the past decade. The 1960s, 1970s, and 1980s groups now have wealth levels 11 percent, 18 percent, and 34 percent below benchmarks established by earlier generations, respectively. For each group before 1980, the largest amount of debt is their mortgage. My group’s largest debt is student loans. Because this debt isn’t tied to an appreciating asset like a home, 1980s families fell further behind wealth expectations from 2010 to 2016.
Sound pretty bad? There are still plenty of reasons for my cohort to be optimistic for the future. As the Baby Boomer generation exits the workforce, Millennials hope to see a spike in earned income. This provides the opportunity to create good saving habits and to buy appreciating assets. The study expects both the income and wealth trajectories of my generation to be steeper than of those past. Improved health at later ages can also be of benefit. We can work longer during our peak earning years, pushing back full retirement into our 70s or 80s. A commitment to paying down debts and investing for the long-term are key to my generation’s wealth accumulation potential.