(Bloomberg) -- With money, as with life, timing is everything. The trouble is, many of us are making moves in the wrong decade.
We hear about the dangers of debt when we’re young, but pay off the wrong loans first. We know to ramp up savings for retirement, but take on the wrong sort of risk. And when we discover the plans we made in our youth no longer make sense, we plow forward anyway.
Financial advisors say these kinds of timing missteps are increasingly common with each generation moving into a new phase of life. The older half of Gen Z is entering the workforce. Millennials are growing their families and wealth. Gen Xers, at their peak earning years, are becoming the new “sandwich generation.” And the last of the baby boomers are heading into retirement. Meanwhile, interest rates are higher than they have been in years, the job market is cooling, and the jury is still out on whether the US can avoid a recession.
“The problem with assumptions and rules of thumb is that their construction is based on the environment at that time,” said Mark Struthers, a financial planner at Sona Wealth. “In our current environment, we are living longer, and college, health care, and housing costs are increasing faster than the wages to support them.”
What are those old assumptions? How can you make sure you’re adapting them for your stage of life? Below are the adages financial advisors say each generation should be wary of adopting.
GEN Z
The labor market’s newest crop of workers is here. Having grown up during the Great Recession, older Gen Zers are known to prioritize saving and investing at an earlier age compared to older generations. But many are starting off with a lot more student debt — even compared to millennials.
The assumption: “All debt is bad”
Yes, paying off debts is a sound strategy in the broadest sense, but tackling debt too aggressively can have unexpected downsides.
The trouble: Focusing too much on eliminating cheap debt can prevent borrowers from building an emergency fund or achieving other milestones. It is almost always a good idea to pay down debts with high interest rates, such as those from credit cards. But a lot of student loans have the sort of low interest rates that are hard to come by now, and servicing them at a slower pace could help a borrower focus on other goals.
The fix: “I get wanting to get rid of debt but there’s a balance we want to strike,” said Douglas Boneparth of Bone Fide Wealth. He recommends tackling debts with an interest rate above 7%, but stressed the importance of having several months of cash reserves on hand before making more aggressive moves.
The assumption: “I should invest in what I know”
Buying shares of companies you understand sounds like a good idea. But Karen Ogden, a partner at Envest Asset Management, thinks Gen Z investors may need to reconsider the infamous Peter Lynch line, “Invest in what you know.”
The trouble: Gen Z knows a lot — maybe too much — about tech. Apple Inc., Alphabet Inc., Microsoft Corp. and Amazon.com Inc. have been around longer than many of them have even been alive. But these firms might not always be, or at least, they might not always be star performers.
The fix: “Understand that a growth company like a tech company is going to be adversely affected when interest rates go up,” said Ogden. She advises against buying individual stocks and instead likes clients to consider more diversified exchange-traded funds.
The assumption: “The labor market will stay strong”
Gen Z started entering the workforce just as pent-up demand for goods and services coming out of the pandemic gave rise to a strong labor market. But these early experiences may have left younger workers with an overly optimistic impression about their negotiating power.
The trouble: What goes up eventually comes down. And the ripple effect of higher interest rates to fight inflation has already tilted the scales back in favor of employers. For evidence, look no further than the mass layoffs in tech and banking this year, or the more recent push by employers to return to the office.
The fix: Even when it’s hard to switch jobs or negotiate higher wages, continuously build and re-evaluate your skills, said Sarah Paulson, owner of Valkyrie Financial.
“Keep doing external interviews,” she said. “You then keep up with what your market value is. It’s not a bad thing to take interviews, even when you love what you’re doing, to see what they offer you.”
MILLENNIALS
They’re getting older and hitting a lot of those delayed milestones such as marriage, homeownership, and children. But higher costs of education, housing and health care are making it harder to save.
The assumption: “Risks are best avoided”
Researchers have long noted millennials’ risk aversion in life and investments, often attributed to their experiences in the Great Recession.
The trouble: Skipping out on risk also means skipping out on reward. During last year’s stock rout, millennials were more likely than other generations to ditch the market. That meant they missed a market rally, too.
The fix: “I see it as a literacy aspect,” said Paulson of Valkyrie Financial. She sees a lot of millennials attracted to 401(k)s that say they have “stable return” options, but are effectively cash, which won’t bring the returns they will need to fund their retirements. “When it's explained, people say, ‘I can be a lot more aggressive than that,’” she said.
For millennials who might be risk averse, she recommends target-date portfolios that adjust their investment compositions as clients age.
The assumption: “Financial independence is key”
Many millennials came of marriage age with fierce independent streaks. That’s great, but advisors worry about couples who don’t manage their portfolios together.
The trouble: Partners with split portfolios may be missing out on yield on one hand, or taking too much risk on the other.
“What I tend to see are two people that are too conservative,” said Ogden of Envest Asset Management. “It is important to honor what your comfort is with risk. But if you are conservative and your spouse is conservative and you’re young, you need to figure out a way to get some of those assets more aggressively invested.”
The fix: Ogden recommends couples check in on their combined portfolios annually to make sure they don’t have any blind spots, keep up to date on overall performance, and make sure they aren’t either too riskily or too conservatively invested.
The assumption: “I should have my parents’ lifestyle by now”
Advisors say they see a common mistake with workers nearing their peak earning years: They assume that because they’re in their 30s and 40s, they should have lifestyles that were similar to their parents’ when they were that age.
The trouble: Times have changed. Millennials are paying a median $328,000 on homes, compared with $216,000, the price boomers had to pay at a similar age. What's more, professionals in their 30s and 40s sometimes make the mistake of comparing themselves to their parents when they moved off to college, forgetting that their parents were later on in their careers by that point, often in their 50s and 60s.
The fix: Advisors caution against “lifestyle creep,” spending more as one’s salary increases. “If you’re working hard and getting paid more and you want to increase your lifestyle, fine,” said Boneparth of Bone Fide Wealth. “But make sure you’re increasing your investing and spending rate.”
GEN X
A lot of today’s mid-40 and 50-somethings are moving into the role of the “sandwich generation” because they are stuck between twin pressures: caring for children but also aging parents.
The assumption: “They’ll pay for college like I did”
It’s one of the biggest, most out-of-date assumptions Struthers hears as an adviser at Sona Wealth. A Gen X parent paid her way through college, so she expects her child to do the same.
The trouble: College prices have skyrocketed. The average cost of tuition and fees at four-year public schools has gone up 180% over the past two decades. Wages have not kept pace. This can lead to either a student taking on high amounts of debt or parents eventually caving in.
“What usually happens is [parents] don’t stick to it,” Struthers said. “And then because it wasn't planned, they’re tapping emergency savings, they’re tapping retirement savings.”
The fix: Struthers reiterates a blunt fact about college financing. “The money’s coming from somewhere.” Having a plan, understanding the costs and communicating how they will be covered clearly can help parents avoid raiding their retirement accounts later.
The assumption: “My parents don’t want me prying”
Conversations about an aging parent’s trusts, estates or long-term care needs can be awkward. This is an area where Gen Xer Marguerita Cheng, a financial adviser and CEO of Blue Ocean Global Wealth, says she fields a lot of calls from people her age.
The trouble: Avoiding tough subjects can make matters more stressful — and more expensive — when a parent eventually has a health issue.
The fix: One tip Cheng has is to use big life events as an opportunity to discuss difficult planning matters. In her own life, she used the birth of her second child as a nudge to get her parents to reassess their estate plan.
The assumption: “I should own a home”
Homeownership is seen as a sign of success and stability. But setbacks such as the dot-com bubble, 2008 housing crash and pandemic have left a higher proportion of Gen Xers out of the market than previous generations.
The trouble: Taking on a 30-year mortgage in your 40s or 50s could mean big housing payments that last well into retirement. That, says Struthers, could limit flexibility later in life.
The fix: “Renting isn’t always bad,” said Struthers. Putting aside the emotional aspect of owning, if your rental costs are lower than homeownership costs, and you invest the difference, you could end up with a higher net worth.
BABY BOOMERS
As more direct beneficiaries of the postwar economic boom, baby boomers have solidly entered retirement age with the support of pensions, savings and Social Security, in many cases. Yet with inflation sticking and interest rates elevated, retirees may need to reassess some old plans.
The assumption: “I’ll pay off the house before retirement”
The goal of eliminating a housing payment before ending work is a good one. But those who pursue it too aggressively may give up a perk from the previous economic cycle.
The trouble: Mortgage rates were at historic lows for years, at one point reaching the 2% range. Using cash to eliminate that cheap debt completely might feel good, but it could be earning higher returns in the market or even a high-yield savings account.
The fix: Cheng, of Blue Ocean Global Wealth, once gave a retiring client who wanted to pay off her house entirely a suggestion: “Pay half,” she said. The client got the emotional satisfaction of making a dent in the payment, but also kept generating returns in the market.
The assumption: “I should downsize to a cheaper area”
Everyone’s heard the story of retirees moving from expensive urban areas to historically cheaper destinations such as Arizona and Florida.
The trouble: The housing-market map has changed. Prices in classic retirement havens like Phoenix, Miami and Tampa are near all-time highs.
The fix: “You need to have backups,” said Struthers. The idea of selling a house in a pricey location and pocketing the difference by moving to a cheaper area is a good one, but you have to make sure the numbers still add up.
The assumption: “I should allocate 100 minus my age to equities”
A longstanding asset allocation tip for people has been to take 100, subtract their age from it, and invest that percentage in equities and the other amount in more conservative assets like bonds.
The trouble: We’re living longer and things are getting more expensive. Many planners now think boomer retirees may need more stock in their portfolios than did previous generations.
The fix: Struthers generally estimates investors should up that 100 to about 130, which would increase the amount of stock in a portfolio and, hopefully, result in higher retirement income.
--With assistance from Suzanne Woolley.
To contact the authors of this story:
Claire Ballentine in New York at [email protected]
Charlie Wells in London at [email protected]