It’s becoming fashionable these days to preach about the shortcomings of the millennial generation, with many people believing they are causing their own problems by favouring the experience of life now rather than hunker down, earn a decent crust and save for their future as their parents and grandparents did.
But the truth is millennials have grown up into the post credit crunch era of poor wage growth, wavering job prospects and little opportunity to accumulate wealth at the time of their lives when they should be building wealth.
Planning and saving for retirement is a challenge for almost everyone these days, especially the younger generation. Preparing for retirement can be even more daunting as there are so many competing demands chipping away at salaries: rent, travel, basic living expenses and, for many people in their 20s and 30s, university debt.
It is daunting, yes, but not impossible. It is not guaranteed that someone will be able to build an adequate nest egg during their career, even if earning power improves. However if millennials build a solid financial foundation and exercise some discipline over the years, they can certainly improve their chances.
One of the best things younger people can do to help their future selves is develop responsible money habits. This is not skipping a few lattes, but adopting an overall lifestyle that allows someone to live below their means.
To a millennial this might seem unusual behaviour, however by spending 100% of every monthly salary on supporting their lifestyle, they won't be able to set enough aside for the unforeseen events that life invariably throws up: job losses, car repairs and of course, eventual retirement.
It is also crucial to develop good habits early on when it comes to credit, especially credit cards. The obvious reason is that financing your lifestyle with plastic can get expensive, with interest rates often exceeding 20% a year.
People should be careful not to fall into the trap of believing that they can afford something just because they can flash a card or wave their iPhone.
Millennials should also start saving, even if it’s only a small amount each month. It is often said that a sensible figure to set aside is 10% of our salary each year, but for millennials this is unrealistic. There will be months on which it is simply impossible to save anything, however, most people should be able to save at least something on a regular basis, whether it's 1% of pay, 5%, £50 a month, whatever.
Getting that early start, even with a modest amount, is crucial, since establishing the discipline of regular saving in our 20s or 30s makes it more likely we’ll continue that regimen in our 40s and 50s when we are earning more and can likely afford to save more.
Millennials should also ensure they are getting maximum contributions into their workplace pension. If your employer offers to match your workplace pension contributions, don’t leave this free money on the table, it is important to take full advantage of any match. Auto-enrolment is useful here, although initial contributions are small, it is something.
It is also important to put savings to work. Saving alone probably isn’t enough for most Millennials to retire comfortably.
One way of doing this is with an ISA. If the workplace pension is fully matched then savings could be diverted into a Lifetime ISA. This offers a 25% Government bonus, worth up to £1,000 per year if you make the maximum contribution of £4,000, and is flexible. You can use the money saved towards buying your first property or as a retirement fund, which you can access tax-free after you turn 60.
Also, remember to keep investments simple. You might be confused or even intimidated by all the investment options out there. Don’t be, as millennials have a very long way until retirement, and a lot of the day-to-day volatility of the stock market can be ignored. Pick one or two funds and hold them for a long time. Be patient, and keep it simple.
It is also good practice to take advice from those close to you, such as friends and parents. Although it is unlikely that parents have faced the same sort of challenges as they have never held student loans and do have a pension plan in retirement, they could be a good source of knowledge and advice. Likewise, friends who are in the same boat can share ideas and discuss options.
A crucial part of retirement planning involves thinking about financial security for you and your family should the unexpected happen. That involves life insurance, income protection or disability insurance. Don’t skimp without insurance just to save a few quid.
Should we really be worried that the younger generation are not saving enough for retirement, when it is so difficult to predict when they might actually retire?
People are living longer than they used to, with today’s twenty somethings expected to live into their nineties. If our millennials are going to live until they’re 100, it is reasonable to assume they will be working into their seventies and eighties. After all, if you’re going to stop working at 65, what are you going to do with 35 years of retirement?
Millennials will not be able to rely on the State Pension and will probably need to work past 65 in order to fund their retirement. We don’t agree that retirement for millennials is dead in the water, just further away than any generation before them. Maybe millennials don’t even view work as a means to retire, but as a way of earning enough to build those assets, such as health and education, that will enable them to continue to work throughout their lifetime.
Dan Brent
Consultant
