Have Millennials Run Out of Time to Build Wealth?

The oldest age cohort of millennials are reaching their 40’s and finding they are less wealthy than the baby boomers were at the same age. Some may feel they are racing the clock to catch up with their seniors.

Despite being more educated than previous generations, fewer millennials own homes and have a lower net worth than both Generation X and the baby boomers. For example, only 61% of millennials own a home by age 40 compared to 66% of baby boomers by that age. Additionally, Full-time workers with Bachelor’s degrees tend to see income peak in their 40s and 50s, and by their late 50s and 60s, income consistently declines.

This is alarming because the baby boomers boasted a middle-age net worth of $113,000, while the total net worth of the Millennials drags behind at $91,000 by age 40—a near 21% decrease. Furthermore, the median debt for baby boomers, at age 40, was only $60,270, while the median debt for 40-year-old millennials has skyrocketed to $128,020.

MillennialsGeneration XBoomers
Cost of a year of college$24,600$13,800$10,300
Homeownership rate61%68%66%
Median cost of a home$328,000$304,000$256,000
Median net worth at 40$91,000$94,200$112,500
Median debt at 40$60,300$118,200$128,000
Source: Federal Reserve

Do millennials have enough time to catch up?

So this begs the question, “Do millennials have enough time to build wealth before it’s too late?”

The millennial woes are partly due to many people in this generation graduating from college and entering the workforce amid the 2008 economic recession, which was one of the worst economic events since the Great depression.

Fast-forwarding to 2020, the coronavirus epidemic struck and caused yet more obstacles for employment, not to mention plunging many young Americans into debt as they struggled to stay afloat. According to Pew, between 30-35% of Americans aged 18-49 said they struggle to pay their bills, and 21-25% said they had problems paying their rent or mortgage.

These crises also coincided with long-standing economic issues such as the deindustrialization of the US economy and globalization of manufacturing that have contributed to wage stagnation since the 1970s.

As the US economy is rebounding from the coronavirus economic contraction, it provides a light at the end of the tunnel for many behind the curve looking to catch up.

Student Debt

There are significant differences between millennials and baby boomers in terms of debt—both in terms of credit card and student debt. This has a large impact on the disparity in their overall financial well-being.

According to Experian, the millennials’ total average debt experienced an 11.5% change from 2019 to 2020 compared to baby boomers, whose change in debt was only 0.3%.

Millennials also borrow significantly more than their parents did for higher education. Those who started college in 1999 paid an average of $15,604 per year for undergraduate tuition, fees, and room and board. For baby boomers and Generation X, adjusted for inflation, their cost of tuition was about $10,300 per year. For millennials, education debt now represents a much larger share of overall debt than it did for Boomers, and they also have fewer mortgage obligations than boomers did by age 40.

This shifting nature of debt composition represents a change in the workplace demand for employees to have a bachelor’s degree. For example, millennial degree holders earn 113% more than those with a high school diploma, while boomers only made 57% more than their contemporaries with high school degrees.

Homeownership

The millennial wealth woes are also partly attributed to the difference in the cost of homes. Despite the federal reserve lowering interest rates and making mortgage rates very attractive, 18% of millennial renters reported they planned to rent forever. When asked why, 63% of those who do not plan to buy a home cited not being able to afford a down payment as the main reason.

Part of the rise in home prices is attributed to the inability to build new homes due to material shortages caused by the coronavirus. It is possible that as the effect of the pandemic on supply chains recedes to pre-covid levels, prices and availability may stabilize. Nevertheless, there is a pattern of homeownership rates dropping for most age groups in the last 40 years.

Net Worth

The total net worth of millennials is only 80% of the wealth the baby boomers had by age 40. Some of the differences can be seen as part of a larger shift in US demographics and wealth inequalities.

Since 1990, the median income of 25- to 44-year-olds has barely changed when you take into account inflation. This is despite housing and education costs outpacing income and inflation rates.

Millennials represent the most diverse generation in the US. Because of this, the racial disparities in wealth are more acutely felt by millennials.

Minority populations have less inter-generational wealth and often earn lower wages than white Americans.

The median white household has eight times as much wealth as the median black family and more than five times that of a Hispanic Household.

It’s notable that the impact of the pandemic disproportionately affects minorities: 43% of black Americans, 37% of Hispanic Americans, and 23% of Asian Americans reported they had trouble paying bills compared to just 18% of white Americans since the outbreak in February of 2020.

Minorities also have higher participation in sectors experiencing instability and rapid change due to automation and e-commerce, like retail and transportation. As a result, the unemployment rate for black Americans has improved slower and is still higher when compared to white Americans.

What can millennials do?

The life expectancy of Americans is increasing, which obviously means children are receiving their inheritances later on in life. In many cases the inheritances will also be smaller than before. This explains some of the differences in net worth among 40-year-olds of different generations. What can millennials do to build their net worth?

  • The first step in planning for financial success is defining goals and prioritizing needs. This starts by taking a good look at where you currently are and where you want to be by retirement. If you can reduce spending and debt, that’s a great place to begin, but do not forget about minimizing taxes and generating additional income.
  • One of the more fortunate changes the coronavirus pandemic has caused is making remote work more accessible. Picking up a side gig has never been easier, and lots of platforms and apps allow you to work from home on an hourly or part-time capacity.
  • Investing is also another way to build more wealth. Stock trading applications, like Robinhood, allow you to invest in stocks without the commission fees that can be prohibitive to the less-experienced traders. Setting up investments and passive income streams can be very beneficial as they require less time and attention than adding hours to your workweek.
  • Similarly, if you are one of the many in student debt and have high monthly payments, it may be worth refinancing student debt to reduce monthly payments. This can also give some much-needed flexibility in monthly cash flow.

It’s not too late to start building wealth, and future you will thank you for it! Start with the basics: build a budget, improve on the budget where you can, and diversify investments and income streams.