The latchkey generation begins retirement next year and faces a host of investment concerns and challenges. The Generation X report released by Natixis Investment Managers included a pulse check of investment sentiment and opportunities for advisors for this oft-overlooked demographic.
A Roller Coaster of Investing Experience
“Generation X’s experience as investors has been shaped by a 25-year bust and boom cycle,” Natixis wrote in the report. This includes being young investors during the dot-com bubble burst and in their 30s for the great financial crisis. It also meant nearing retirement age during the COVID-19 pandemic and soaring inflation.
It also included enjoying the decade-long equity bull run of the 2010s — an experience that shaped expectations. Most Gen Xers surveyed reported a 13.1% long-term return expectation above inflation. That conflicts with advisors’ expectations of 9% as a realistic goal.
This expectation shapes investment habits, leading to greater risk-taking and volatility exposure. Nearly half (47%) reported greater risk than they are necessarily comfortable with in their portfolios to try and meet retirement and investment goals. And when push comes to shove, 72% of Gen Xers would seek safety over returns.
“This disconnect could be costly as they near retirement,” explained Natixis. “They will have less time to make up for potential losses, and income plans for nest egg savings could be thrown out of balance in the important early stages of drawdowns.”
Common Investment Traps Generation X Falls Into
Generation X also cannot agree on how it best defines risk. In total, 25% of those surveyed answered risk equating to volatility, while 23% believe it’s loss of wealth. Only 11% of respondents reported risk as a failure to meet goals.
A common trap that Gen X falls into currently in its investment habits is an overallocation to cash. While the volatility and elevated risk of the last few years drove a number of investors into cash and cashlike strategies, this creates elevated risk for those near retirement. An overallocation to cash leads to reinvestment risk, the real return rate of cash when factoring in inflation, and longevity risk. A greater allocation to cash often also means a reduced allocation to long-term fixed income.
Bonds remain a murky area of investing for most Gen Xers, with most (61%) expressing a preference for stocks over bonds. Given low interest rates over much of Gen X’s investing lifetime, most do not understand the effect of high rates on bonds, or bonds in general. It’s a notable area of educational opportunity for advisors.
Passive investing also remains an area of confusion for many Gen Xers. Sixty-one percent believe index funds offer less risk than the market, and 67% believe index funds offer downside protection. A further 61% think index funds capture better opportunities in the market.
“These misconceptions can be risky at any point in life, but they are amplified for pre-retirees like Generation X,” Natixis noted. “In the event of a down market, those who are overly reliant on passive investments could be exposed to significant losses at an age when they have less time ahead to rebuild their assets.”
The Role of an Advisor Cannot Be Understated
Generation X also recognizes its own investment knowledge shortcomings and challenges. A full 56% reported needing professional advice across the investing spectrum. While a third currently relies on an in-person financial advisor, 49% of respondents globally report a growing preference for digital advice. In North America, it’s worth noting the interest in digital advice declined between 2019 to 2023.
When it comes to finding a financial advisor, 48% of Gen X report financial planning as their top service need. Followed closely behind this are retirement income planning at 44% and sustainable investing, also at 44%.
Once they make that connection, this generation places a great deal of faith and belief in their advisor.
“When asked who they trust when making financial decisions, Gen Xers are as likely to answer with “my advisor” (91%) as “myself” (91%),” explained Natixis. “In fact, those surveyed were more likely to trust their advisors more than they trust family (76%) and close friends (63%).”
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