Inflation Is Causing Gen X to Cut Back — but Not on Saving for Retirement

At this time of high inflation, what are you cutting back on?

The answer may depend on your generation. For Gen X — that is, people born between 1965 and 1980 — the answer is clear. Anything but retirement savings.

Gen Xers have slashed their spending over the last year, choosing instead to prioritize saving for retirement. It makes perfect sense: Older Gen Xers, now in their mid- to late 50s, are approaching retirement and don’t want to upend carefully thought-out retirement plans.

For a generation that has found it difficult to save for retirement, this late push might be a game-changer. And for anyone else, it is a great example of how to save for retirement even when times are uncertain.

Which generation is best with money?

Analysts have long been pessimistic when it comes to Gen X’s retirement prospects, and for good reasons. Gen Xers are less likely to have any retirement plan than their parents did at the same age, and it’s even been suggested that Gen X could learn from millennials when it comes to saving for retirement.

Gen Xers themselves have expressed pessimism. Many are downbeat about their financial outlook, according to State Street Global Advisors’ Inflation Impact Survey. In comparison to both millennials and baby boomers, Gen X reported higher levels of stress and anxiety both during the pandemic and in today’s inflationary environment. In addition, just 22% of Generation X workers are “very” confident they will be able to fully retire with a comfortable lifestyle, according to a recent report by the Transamerica Center for Retirement Studies.

It’s not surprising that members of Gen X are more negative about their finances, says Brie Williams, head of practice management at State Street. “With work, family and life commitments colliding,” she says, “this generation is understandably pessimistic and acutely concerned.”

The current record-high rate of inflation across the economy is only making matters worse. Inflation reduces the amount of discretionary funds that Gen X can spend, says Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners. “With higher food costs, rent, and transportation, combined with stagnant wages, people don’t have much left over for other discretionary expenses,” she says.

Inflation drives spending cuts

But people are capable of change. As everyday living expenses climb, we might have expected that Gen X would find it even more difficult to save for their nest egg. That’s not the case. In fact, State Street Global Advisors’ Inflation Impact Survey suggests the exact opposite: that Gen X is prioritizing their retirement plans over vacations and other forms of spending.

Among other strategies, Gen Xers are opting to cut back on discretionary spending and they’re delaying major purchases, all in the name of not sacrificing their contributions to long-term financial goals such as retirement or education savings.

In almost every category of “non-essential” spending, Gen X report cutting back far more than their younger and older peers. Close to two-thirds of Gen Xers said they had cut their discretionary spending in the last year, compared with just 37% of millennials. At the same time, just 5% of Gen Xers contributed less to their retirement funds, compared with 18% of millennials and 11% of boomers.

How to save when inflation is high

Given how hard Gen Xers have found it to save for retirement, this recent focus on building a nest egg is especially admirable. Indeed, many analysts see Gen X’s response to the current inflationary pressures as a model worthy of imitation. Nearing retirement, it seems that the average Gen Xer is acutely aware of the negative impact that inflation can have on retirement funds, and has decided to do something about it.

Their strategy? It's pretty simple. Cut back on discretionary spending and channel the savings into long-term investments, despite the recent market volatility. As Douglas Boneparth, financial advisor and president of Bone Fide Wealth, puts it: “I think Gen X has seen a lot over the last two market cycles and understand that volatility is part of the game. They also have some time on their side to invest for retirement, so making up losses is going to be easier for them than boomers.”

This is not a new strategy, of course, but it’s still a good one. As McClanahan puts it, “my advice is the same for all generations — stay out of debt, have an emergency fund, and make sure you aren’t wasting your money on meaningless spending.”

In other words, Gen X is simply doing what we all should do.

Gen X's long game

Cutting back on discretionary spending is not new: It’s been good advice for generations. However, it takes a certain determination to do this at a time when prices are rising so rapidly.

That’s why Gen X should be applauded: Not just because they are setting themselves up well for retirement, but because they are setting a good example.

It’s a lesson that could prove invaluable. As Williams notes, about half of all investors believe that the lessons learned by navigating the current inflationary environment will have a lasting impact on their spending and saving habits moving forward. The current period of inflation, in other words, may be teaching all of us how to deal with the next one.

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