Will the Young Ever Retire?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham.
2019 has produced a lot of alarming headlines about pensions and retirement for millennials and other young people. One report by The Guardian in July claimed that over 600,000 people who currently rent privately will likely be unable to cover these costs on their projected pension income. As a result, it is claimed that many people will face pressure to delay retirement and continue working to cover the cost of living.
Another report by the Organisation for Economic Co-operation and Development (OECD) in the same month found that a 23 year-old in Britain is now likely to retire at age 68. This compares to 66 for their parents’ age group and 65 for their grandparents’. As a result, millennials looking to retire at 65 will probably need to save tens of thousands more for retirement than their parents did. Due to longer projected life expectancies in retirement, young people will probably also need to ensure their pension pot(s) can stretch further than those of their parents.
This can make grim reading for millennials and parents of young adults who want to ensure a comfortable retirement after a life of hard work. Indeed, as many as 1/4 of 18-35 year-olds believe they will never be able to afford to retire at all. However, here at Castlegate our financial planning team in Grantham would encourage parents, grandparents and young people not to despair over millennials’ retirement prospects. With careful financial planning, it is possible to lay a strong financial foundation for your future. Especially if you start early.
Inheritance & the state pension
One of the first steps in millennial retirement planning is to take responsibility, and take advantage. The government is unlikely to pay for all of your needs in retirement, but that doesn’t mean there aren’t important state pension benefits which you should leverage in your plan.
In 2019-20, the full new state pension gives you £168.60 per week (about £8,767.20 per year). To receive this after you reach your state pension age, you must have contributed at least 35 years of qualifying national insurance contributions (NICs). Most young people in work will do this automatically through their employer, via PAYE. There is no guarantee, of course, what will happen to the state pension 30 or 40 years from now. However, it is mandatory to make NICs if you are earning, and the income from your state pension could go a long way to helping millennials meet their living costs in retirement.
One important thing to note before we move on concerns inheritances. Many young people vastly overestimate how much they will get, and often think it will come sooner than it really will arrive. The average UK inheritance in 2019 is only £11,000, and most people are likely to get it in their 50s or 60s. Some people may get much more, sooner, of course. However, it’s important to not hang your hope about retirement income or a house deposit on an inheritance. Try to think of it as a welcome bonus to your financial plan if it eventually arrives.
Planning for housing and the cost of living
It’s important to note that nobody knows for certain what rents and other costs of living will be in 30 or 40 years. What we can do, however, is outline different possible scenarios which you can prepare for with your financial planner. Presently in 2019, it isn’t unusual for young people to spend 40% of their monthly earnings on rent. Of course, radical changes to the private sector, taxation and public housing funding could result in a lowering of this percentage in future years or decades. However, it is also important to prepare retirement plans for pessimistic scenarios, where the cost of living and housing continues to rise.
This brings us back to a point made earlier in this article: start your retirement plan as early as possible. A 21 year-old starting out in their career could potentially have 40+ years to make pension contributions and benefit from the extraordinary growth power of compound interest. For instance, simply putting aside £200 per month into a private pension could grow to a pot of £236,190.10 over 40 years (assuming average annual returns of 5%). Admittedly, this is unlikely to cover most people’s living costs in retirement today. Yet it’s an important start.
Hopefully, as you climb the career ladder and increase your earnings, you can also increase your pension contributions after taking advice from your financial adviser. Remember also, in 2019-20 the UK government will “top-up” your pension contributions via tax relief, which can push up your retirement savings even further and any growth your pension makes is taxfree.
No financial planner can accurately foresee what will happen to the pension landscape in 2050, 2060 and beyond. Yet it’s important to take responsibility for our future and that of our family, by planning ahead and starting a savings and investment strategy which helps to cover your likely expenses in old age. Working with an experienced independent financial adviser can help you to cover all of the essential areas you need to account for, avoid common planning pitfalls and fully leverage the tax vehicles and tools available to boost the real value of your future wealth.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense: