Work more, save more, buy less stuff and millennials will be in a good position to retire.
In their Millennial Matters series, Rathbones looks at the current retirement landscape; from the most common shortfalls to how millennials will be worse off than their parents.
The housing shortfall
Home ownership is on the decline. By age 30, 60% of baby boomers owned their home, today the rate is just 30% for 30-year-old millennials.
The Resolution Foundation estimates that one in three millennials will never own their own home. While UK stands out, declining rates of home ownership are also taking place in the US, Southern Europe and Australia.
Despite the decline of home ownership, 35-44 year olds still believe they will use property to finance their retirement. What’s more alarming is that almost one in four of the 35-54 year olds who plan to do this don’t own a house yet!
The savings shortfall
In 2015, Ipsos Mori asked people in Britain to estimate how much someone would need to save in a private pension to achieve a total annual income of around £25k upon retirement (the average pension income). The figure below shows the huge discrepancy and knowledge gap facing society. More educated workers aren’t necessarily more financially savvy either, with only one in ten able to meet the adequate replacement rate.
On top of this Investment returns and annuity rates are also seen as further threats to the savings shortfall. Lower economic growth means returns on equity investments will be lower, and if lower returns are generated in the future it means people will need to save even more to overcome this. The alternative would be to perhaps allocate more assets to generate a higher return, however this comes with higher risk. And for people with limited savings already, this would not be an option. Add to this a student loan of c£51,777 (the amount of debt an English University Student is expected to accumulate if they take out a full student loan in 2017/2018) and it seems an uphill climb before they’ve even entered the workforce.
The Government shortfall
UN population projections suggest that in 25 years there will be two dependents for every worker, compared to the one on one split we see today. With Three quarters of today’s global $70 trillion savings gap resting with governments, it’s important for governments to take action. Governments will be expected to borrow more and expect workers to work longer, however State Pensions will be reduced, meaning millennials will be required to support themselves through their pension pots more than their parents during retirement.
The younger generations are likely to be less comfortable in retirement than their predecessors. They are more responsible for their welfare and must bear risks previously shouldered by defined benefit pension plan providers. Yet, they don’t seem prepared. To make matters worse governments aren’t ready to fund large increases in the number of state pension beneficiaries either. While it goes too far to pronounce younger generations ‘too poor to retire’, ‘too poor to retire at the same age as their parents’ seems fair.
What can we do?
» Get talking! Discuss pensions with younger friends and family members.
» Engage young savers. Those who find innovative ways to engage young savers stand to do especially well.
» Use technology. There is also an opportunity for firms offering new technology and business services to facilitate the flexible working that would enable participation in the workforce later in life.
For more information on this important topic, you can download the full Too Poor To Retire report on the Rathbones website.