Generational Divides in Investment Behavior: The Impact of Rising Costs and Stagnant Wages on Millennials and Baby Boomers

The U.S. economy is at a crossroads, with inflation, wage stagnation, and rising living costs reshaping how generations approach investing. While millennials—born between 1981 and 1996—navigate a landscape of constrained resources and shifting priorities, baby boomers, who came of age in the 1960s–1980s, rely on decades of stable returns and risk-averse strategies. This divergence reflects not just generational values but also the structural forces of economic inequality, technological disruption, and policy evolution.

The Economic Context: Inflation, Wages, and Cost-of-Living Pressures

The past three years have seen inflation ease from a peak of 6.5% in 2022 to 2.7% by June 2025, but the scars remain. For millennials, this period coincided with stagnant wage growth, with median incomes rising only 8.3% from 2023 to 2025, outpaced by a 5.9% increase in household expenditures. In contrast, baby boomers, many of whom retired or are in their final earning years, face different challenges: preserving capital and generating income in a low-interest-rate environment.

The cost-of-living index has also diverged by generation. Millennials, burdened by student debt and housing affordability crises, spend far less per household than baby boomers. In 2023, the 1965–1980 cohort spent $95,692 annually, while millennials (1981–1996) spent $81,589. Meanwhile, housing costs—up 3.8% year-over-year—remain a drag, with millennials facing a home price-to-income ratio of 8.5 in 2025, compared to 6.1 in 2000.

Generational Investment Preferences: Risk, Assets, and Values

Millennials and baby boomers differ starkly in their approach to risk and asset allocation. A 2024 Bank of America Private Bank study found that 72% of millennials and Gen Z believe traditional stocks and bonds alone cannot deliver above-average returns, compared to 28% of older investors. This skepticism drives millennials toward alternative assets: private equity, real estate, and digital assets like crypto. For instance, 26% of millennials cite private equity as their top growth opportunity, versus 15% of boomers.

Meanwhile, baby boomers remain anchored to traditional portfolios. Their trust in the S&P 500, which has delivered an average annual return of 10% over the past 30 years, contrasts with millennials' preference for diversification. The latter group also prioritizes ESG (environmental, social, and governance) investing, with 82% of investors aged 21–43 considering ESG criteria, compared to 35% of those over 44.

Risk Tolerance and Behavioral Shifts

The pandemic and subsequent market volatility exposed generational differences in risk tolerance. Millennials, who entered the workforce during the 2008 crisis, demonstrated a surprising adaptability. A 2020 E-Trade survey found that 51% of Gen Z and millennial investors increased risk tolerance during the crisis, 23 percentage points higher than the general population. This willingness to act on market dips—such as the March 2020 crash—has allowed some to capitalize on undervalued assets.

Baby boomers, however, tend to prioritize capital preservation. Their portfolios often include bonds, annuities, and dividend-paying stocks, reflecting a focus on income generation rather than growth. This contrasts with millennials' embrace of high-growth sectors like tech and renewables, even amid macroeconomic uncertainty.

The Great Wealth Transfer and Its Implications

As the Great Wealth Transfer—projected to shift $124 trillion by 2048—gains momentum, millennials and Gen Z are set to redefine investment norms. Their preference for ESG, alternative assets, and digital tools will likely drive demand for innovative products. For example, robo-advisors and ESG-focused ETFs are growing in popularity, with millennials allocating 14% of their assets to stocks (compared to 17% for boomers at the same age in 1989).

Yet challenges persist. Millennials' median debt ($128,000 in 2021) and lower homeownership rates (61% vs. 66% for boomers) limit their ability to build wealth. This raises questions about long-term financial security, particularly as inflation erodes purchasing power.

Investment Advice for a Fragmented Market

For millennials, the key lies in balancing growth and prudence. Prioritizing ESG and alternative assets can align portfolios with values while mitigating risks. However, overreliance on high-growth sectors like crypto or tech requires caution, given their volatility. Diversification—across geographies, sectors, and asset classes—remains critical.

Baby boomers, meanwhile, should focus on income-generating assets and inflation hedges. Treasury Inflation-Protected Securities (TIPS), dividend stocks, and real estate investment trusts (REITs) can help preserve purchasing power. Rebalancing portfolios to reduce exposure to long-duration bonds—now yielding less than 2%—is also advisable.

Financial institutions must adapt to these shifts. Offering digital tools, ESG integration, and education on alternative assets will better serve younger clients. For older investors, emphasizing legacy planning and tax-efficient withdrawal strategies remains essential.

Conclusion: A New Era of Generational Finance

The interplay of inflation, wages, and generational values is reshaping the investment landscape. Millennials' focus on innovation and sustainability, coupled with their willingness to embrace risk, contrasts with baby boomers' emphasis on stability and income. As these dynamics evolve, the financial system must bridge the gap between tradition and transformation—ensuring that both generations can navigate uncertainty with confidence.

In the end, the future of investing will be defined not just by market cycles but by the choices of a generation that demands more from their portfolios: not just returns, but purpose.