Investors are anticipating a recession and, rather than panicking, they are taking proactive steps to prepare and minimize its impact, according to Northwestern Mutual’s 2023 Planning & Progress Study.
While 67% of the 2,740 investors surveyed are expecting a recession this year, 64% will be cutting costs in anticipation of it, the study found. Respondents are preparing in other ways, as 50% said they are building up their savings and 41% are postponing large expenses until the economy stabilizes.
The pattern is the same with those respondents who have more than $1 million in investable assets, as 50% said they are building up savings and 38% are holding off on large purchases.
“Periods of uncertainty provide opportunities to stress test financial strategy,” said Christian Mitchell, chief customer officer at Northwestern Mutual, in a press release. “Consumers want to know if their wealth building plans and their lifestyles will remain on track if the economy pulls back, and many are taking positive steps to prepare for whatever economic season may come.”
While investors are taking steps to prepare for a pending recession, the aggressiveness of that work varies significantly by generation, according to the study.
Younger generations appeared to be more worried about the recession than the older ones. The survey found that 23% of Generation Z and 18% of millennials said they are holding off on buying a new home as opposed to 12% of Generation X and 6% of baby boomers. Starting a business was another area younger generations are delaying, as 22% of Generation Z and 15% of millennials are doing that compared to 6% of Generation Z and 2% of baby boomers.
Finally, 29% of Generation Z and 19% of millennials said they are going to stay in their current job and not look for a new one. Ten percent of Generation X and 3% of baby boomers said they were going to do the same.
“For the older generation, they’ve been through this before,” said Erik Stephens, wealth management advisor with NOVA Capital, which is a Northwestern Mutual practice in Cincinnati. “For the younger generation, this is the first time that they’re going through it.”
The two groups are also in different places in their lives as the older generations may have been in their jobs, homes, and families longer and therefore have greater stability. They also have the experience of knowing what to do, Stephens said. The younger generations, who might be considering getting married or starting a business, do not know how a recession will impact them.
One group that is seemingly ill-prepared for retirement is Generation X, who are between 42 and 58 years old. More than half, or 55%, said they will not be ready for retirement when they get there. They also lack confidence in what they have accomplished thus far as 46% said there’s a possibility, they could outlive their savings and 38% said they have not done anything yet to plan for their retirement.
Stephens questions if this generation is actually as unprepared as they believe they are. It could be a lack of knowledge while other aspects of it have to do with what this generation’s priorities have been up until now, he added.
“I think they have dedicated so much financial resources and time to their kids and their family and they’re starting to become empty nesters and they’re starting to think about retirement,” Stephens said.
One of the reasons many may feel unprepared for retirement is because they have not yet put together a plan. In fact, only 52% of those surveyed said they have a plan. The number increases if a person is working with an advisor 79% of those individuals said they do have a plan. It still means there are many who do not have one and Stephens said one of those reasons is they truly do not understand what a financial plan really is.
“Financial planning is saving for goals throughout your entire life,” he said. “I do think the reason people, if they are underprepared or they feel underprepared, it’s because their definition of financial planning is saving for the next thing.”
Investors tend to get overwhelmed when they talk about retirement planning. There are different aspects of what to do that they will sometimes shut down because they are so overwhelmed, Stephens said. It is in those instances that a financial advisor can help and provide the clear vision the client requires.
“An advisor can bring clarity on what they want, but more importantly how to accomplish those goals,” he said.
Regardless of how old a person is or what they have saved up until this point, Stephens said a person can always adjust and save the money they need to fund an adequate retirement.
“One of the things that holds people back in financial planning and really in life is everyone is looking for the perfect solution,” he said. “I’m a big believer that progress and making progress is substantially better than perfection so there’s not a start date that’s too late.”