The Millennial Wealth Conundrum: Exploring the Stark Contrast Between the Top 10% and the Average
Exploring the Striking Contrast Between the Haves and Have-Nots Within the Millennial Cohort
The gap between the rich and poor is growing in the United States. This topic mostly concerns the wealth gap between the Baby Boomer and Millennial generations. However, this gap looks different when you compare the baby boomer generation to the millennial generation. The wealthiest baby boomers are richer than the average baby boomer. But the gap is even bigger for millennials - the richest millennials are way wealthier than the typical millennial. This essay will explore why the wealth gap is so much larger within the millennial generation compared to the baby boomers.
When you compare the millennials vs baby boomers discourse, you’ll find the discourse to center around issues with translating their income into home ownership, having to worry less about retirement due to access to pensions, not having student debt, and being able to buy investments at a time when valuations were lower.
Asset valuations matter more than you think
The issue with valuations is a bigger deal than many think. When someone invests in an asset, the valuation metrics determine whether someone is getting a great deal on their purchase. As many will say, riches are made when people are buying assets for cheap, and that usually happens in recessionary times. For the Boomers, they got to buy assets for cheap during the 1970s and early 1980s when the US economy was in turmoil. For Gen Xers, they had the opportunity to buy assets for cheap during the 2008 financial crisis. Millennials were supposed to have the COVID crisis be their opportunity to buy assets for cheap, but the actions of both the federal government and the Federal Reserve made the dip buying opportunity small, and asset prices went from being less expensive to super expensive.
The Wealth Gap
With millennials being stuck with a lack of opportunity to buy assets for cheap, it’s understandable why millennials have a harder time translating their incomes into homeownership and have more anxiety about retirement. Looking at the chart below by the Financial Times, we can understand why people are concerned with the wealth gap between the average boomer and the average millennial. But when you compare the top 10% of millennials and the top 10% of boomers and compare the gap between their average peers, we will find that the wealth gap is larger among the millennial generation.
The article credits parental assistance as the reason why the top 10% of millennials are doing much better than the average millennial. Think about it. How do millennials afford a pricy home in London, New York, or San Francisco when it would take the average earner two to three decades to save up for the required down payment for the home? It’s because their parents can help them fund the downpayment. Redfin noted that 40% of homebuyers that are under the age of 30 received family money for down payment. The rest of the homebuyers are either living in markets where homes are affordable or they are buying mobile homes, which were known to be the starter homes for the baby boomers.
While it is difficult to say how far parents go to provide financial assistance to their homebuying children, the magnitude of their generosity determines how far their gifts go. If they give more money than the 20% downpayment amount, those homebuyers (or children) would have lower monthly payments on their mortgage and would be paying less interest in the long run. Those financial benefits compound over time, and that is a significant contributor to the growing wealth gap between the top 10% of millennials and the average millennial. With the extra disposable income, that household can invest or save that money, increasing their wealth further.
Many anticipate inheritance to solve all the economic issues that millennials have dealt with. With boomers holding most of the wealth in society, seeing them pass down their assets to their millennial children would provide a significant boost in wealth for the millennials. In my view, I think this trend will further exacerbate the wealth gap between the top 10% of millennials and the average millennial. It’s going to be difficult to close the wealth gap, and I think we shouldn’t demonize the top 10% of millennials for having parents who are willing to help them in their working and family formation years.
To close the wealth gap among the millennial generation, we shouldn’t resort to extreme measures like high taxation or socialism. That will only make conditions worse for future generations and inspire more scarcity in society. Instead, we should focus on promoting economic growth and making things like housing more affordable to people. Deregulation of the business laws can inspire more entrepreneurship and thus more job creation. Changing the zoning laws to encourage more housing development will help many millennials escape the evergrowing rent prices and have more space to start a family. Millennials have already gone to college and are using their degree in their careers. They’re already investing their disposable income into stocks and crypto. They’re already climbing in their careers. Policies need to change so that they can be better able to reap the fruits of their labor.
How can members of Gen Z secure themselves in the 10% of their generation?
I know I will get this question from many of my readers in Gen Z. How can I be part of the 10% of their generation without their parents’ help? Well, that will be difficult to begin with. For me, I was lucky my parents bought our home during our teen years, lived below our means, and saved immensely during my childhood to help fund my education. That’s why I don’t have to worry about student loans. The location where my parents bought a home is close to the train so I can drive to the train station, park my car, and take the train to the city for work. No need to rent an apartment and either live with roommates or pay half my earnings towards it. From there, my living costs are low and I am able to invest more in covered call ETFs and write covered calls on my favorite stocks.
To get ahead of your peers:
Lower your expenses (live with parents, live with roommates, less splurging on yourself)
Invest in dividend stocks or ETFs that pay you dividends every month
Focus on generating as much cash flow as possible and growing the amount of cash you have
I can talk about job hopping to boost your salary growth or on pursuing higher education but everyone’s situation is different. Focusing on lowering your expenses and increasing your cash flow is the fundamentals to getting into the top 10% of your generation. Going to a top school and choosing a great profession are great ways of securing a higher paying job and having less issues with finding a new job if ever you get laid off.
We will all go through challenges and we need to do what we can to survive and get on top of them.