What Kind of Financial Hit Could You Expect from the Next Recession?

By Walker England | Updated: July 11, 2019

The Great Recession, the economic period that began with the collapse of the U.S. housing market in 2007 and lasted through the early 2010s, landed decisive hits to every generation. Millennials just starting out and on the cusp of financial responsibility took a glancing blow, causing them to give pause and rethink everything from making major purchases to deciding when they wanted to marry and have children. Gen Xers were the hardest hit: many paid top dollar for their first homes at the peak of the housing bubble, only to watch helplessly as the value of their investments evaporated. Baby Boomer’s retirement plans took a sucker punch, forcing many of them to delay their exits from the workforce or retire early and adapt to a lower standard of living.

It’s not a question of if another recession will hit, it’s a question of when. If the markets tanked today and heralded the start of another extended recession, what kind of financial bruising can you expect? How would it affect your financial future? We broke it down by the three dominant generations: Millennials, born from the early 80s through the early 2000s; Gen Xers, people born between the mid-1960s and early 1980s; and Baby Boomers, born between the early 1940s and the mid-1960s.

To understand what could happen to your finances if another recession hits, it helps to know what happened to each group during the last one.

How Could a Recession Affect Millennials?

How Could a Recession Affect Millennials?

The fact that Millennials didn’t escape the Great Recession influenced many to be better prepared. That’s a good thing because it is unlikely that they will be able to dodge the next recession either. While they are generally much more financially responsible than Gen Xers or Baby Boomers, many are saddled with repaying high student loan debt, in part due to larger than average increases in tuition costs during this period.

Millennials tend to be pessimistic about the stock market and conservative when they do invest. They typically prefer cash to all other assets for long-term investing and are more diligent at saving than either Gen Xers or Baby Boomers. In fact, many say they plan on relying on their savings rather than 401(k) plans.

Any shrinkage in the job market resulting from a recession is bound to be largely felt by Millennials, who make up more than a third of the U.S. workforce. With more than 1 million Millennial women becoming mothers every year, parents will have to cope with the increasing costs of raising a family while paying off an average of $40K in student loan debt. Those are bills that aren’t going away soon and costs that won’t be going down with the markets.

On the bright side, a market correction could present young investors with an opportunity to invest when stocks are less expensive and with plenty of time for the market to rebound before they need it for their retirement.

How Could a Recession Affect Gen Xers?

Unprepared Gen Xers won’t know what hit ‘em. Their generation was the hardest hit by the Great Recession, largely due to purchases of their first homes at peak prices. For many, those homes accounted for nearly half the value of their assets, resulting in their net worth decreasing by as much as 50 percent. But Gen X is also the only generation to recover their wealth since the Great Recession—and then some. Gen Xers are now entering their prime earning years but still have much higher debt than either Millennials or Baby Boomers and tend to rely on credit cards for living expenses and purchases. Plus, their savings are still painfully low.

For unprepared Gen Xers, a second blow from another recession could be devastating and will leave many with less than 20 years to recover before retirement. They also face Social Security challenges, having paid less into the program if they were underpaid or unemployed during the last recession. As they age, they also face, along with Baby Boomers, staggering increases in the costs of healthcare, an expense that is unlikely to fall with the markets. On top of that, many Gen Xers must now consider not only the costs of higher education for their children but also the expense of caring for aging parents.

How Could a Recession Affect Baby Boomers?

The Great Recession severely altered the retirement options of Baby Boomers; some found themselves forced to retire earlier than planned while others had to work longer to even partially recover their financial losses. People over 65 are staying in the workplace at a rate not seen in more than 50 years, and those numbers are causing a relative drag on the economy. That’s because they are working to save money for retirement rather than for demand-generating purchases like buying a home.

However, the number of employed people over 55 is expected to peak in 2019 and decline over the next 15 years. A recession may force some Baby Boomers to keep working, but many could exit the workforce and start drawing Social Security, adjusting their lifestyles to the resources and savings they already have. If they start exiting the workforce in mass, the sheer number of Baby Boomers retiring could soften the blow of a dramatic downturn in the economy by freeing up jobs—even in a smaller job market—for younger, more consumption-friendly Gen Xers and Millennials. By stepping out of the ring, Baby Boomers can actually help soften the blow from a recession.

Speculation on the Next Recession

The effects of a recession are felt far longer than the duration of the recession itself and, no matter which age group you fall into, a market crash and a dramatic downturn in the economy is going to hurt.

Will the next recession be as bad as the Great Recession? Only time can tell. What we do know is that sub-prime lending, which played a big part in the last stock market crash, is unlikely to be the cause of the next one. Financial institutions have reigned in reckless lending to unqualified homebuyers, thereby decreasing the likelihood of sky-high default rates any time soon. However, there are a myriad of other potential triggers for the next crash and there’s little doubt that your 401(k) plans and any other passive investments will suffer.

In the long run, investors with the knowledge to actively manage their finances could have the best chance to weather a recession and still meet their retirement needs. Remember, even though stocks did eventually recover and exceed their losses from The Great Recession, limiting losses by implementing strategies for a down market could mean less time recouping losses and better returns overall.

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