An established line of psychological theory is that what we experience in late adolescence and early adulthood ends up having a large pull on our behavior throughout life. And economic gut punches pack a wallop.
Numerous studies have shown those entering the job market during a recession suffer significant and long-term income penalties, compared to those who graduate into a robust job market. That's the economy dealing you a tough hand. But our own behavior is affected by economic cycles, too, and that can play out in ways good and bad for lifelong finances.
On the positive side
For all the yammering about how millennials are so in debt, the real culprit is their high student-loan debt. Profligate spending? Not so much. According to data from the Federal Reserve Bank of New York, the combined $210 billion in credit card debt for two age bands that span the millennial age group (18 to 29 and 30 to 39) is equal to what 40- to 49-year-olds have racked up ($200 billion) and the credit card debt of 50- to 59-year-olds ($210 billion).
The FIRE movement (Financial Independence, Retire Early) is a rallying life goal for a distinct portion of millennials. At its core, FIRE requires living way below one's means today to be able to save up gobs of money ASAP that makes retiring by one's 40s (or earlier) possible. Not exactly the "I'll work until I am 70 -- or older" mantra that defines the retirement strategy of their parents, too many of whom lost their jobs and an over-mortgaged family home during the last recession and/or didn't get serious about saving for retirement until they were older.
Automatic enrollment has helped millennials -- not just the FIRE seekers -- get an earlier jump on retirement savings. In a recent Fidelity survey, more millennials (70%) were optimistic they were on track to be able to maintain their lifestyle in retirement than either Gen X (62%) or baby boomers (66%). Youthful exuberance? Perhaps, but it's just as possible they saw everything fall apart at an impressionable age and are more focused on spending less and saving more than their parents and grandparents likely did at a similar age.
There are also anecdotal reports that younger adults have less interest, if not ability, to buy the oversized houses that baby boomers clamored for (and that easy credit-standards financed ) a generation ago.
Downsides to being risk averse
Recent research on the risk appetite among Japanese men born between 1946 and 1989 found that those who lived through a severe economic downturn for at least a year between the ages of 18 to 21 were more financially risk averse in their 30s and 40s than their cohorts who didn't live in a region hit hard economically during their formative years. No other age band had a similar response.
Clinging to a job was more prevalent in the study. As was stifling one's entrepreneurial itch: Up to 30% fewer became self-employed later on. That's not necessarily a negative, until it becomes a reason to play it so safe you never give yourself the opportunity to pursue career dreams that your current job can't deliver.
There's also an investment risk lurking for risk-averse millennials. In its retirement survey, Fidelity compared current retirement portfolio allocations -- the mix of stocks and bonds -- owned by different age groups and compared it to Fidelity's recommended allocation at given age bands. Fidelity deemed any portfolio that was 25% below the recommended stock allocation to be "conservative." Less than one in five baby boomers is invested conservatively according to Fidelity, compared to 40% of millennials.
Zero percent of millennials have an aggressive portfolio where equities are at least 25% higher than the recommended level. One in four Baby Boomers has an aggressive portfolio.
Playing it too safe hasn't been a real issue since the Great Recession. The 14% annualized gain for the S&P 500 over the past 10 years is 40% higher than the long-term gain for stocks. That makes it seem deceptively OK to play it safe with a lower allocation to stocks. But if, as some investing pros expect, stock returns are lower in the coming decade, that strategy may make it harder to build the nest egg needed to retire comfortably.
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