December 7, 2018
There’s a new pessimism in the UK: nearly two thirds of us think younger people will be worse off in retirement than their parents, and less than half of adults now believe their children will have better lives than they did.
A broad swathe of research into the provisioning for retirement suggests this pessimism is warranted. Younger generations simply aren’t saving enough to enjoy the same retirement as their baby boomer parents. That’s rather disconcerting because we believe there are a number of reasons why they may need to save even more than previous generations to retire in the same manner.
When it comes to finances, millennials haven’t had it easy. Many graduated just after the global financial crisis, are facing student debt and struggling to get on the property ladder. Immediate financial woes will have pushed thoughts of retirement to the back of their minds.
The ‘savings gap’ – how far savings fall short of a benchmark for a comfortable retirement – is estimated to be about 5 per cent of earnings for the average worker across all developed economies. Put another way, the average new worker in the UK needs to save or invest between 10-20 per cent of their income to generate a 70 per cent “replacement rate” of pre-retirement income – the widely used benchmark for adequate pension provision.
There is a global funding shortfall, which is likely to keep growing, and this is made worse by the shift in pension provisioning that puts the burden of risk on the individual. Younger generations have three options: worker longer, save more or spend less in retirement.
The reality of a lot of retirements could be very different to the lifestyles currently envisaged. However, millennials that do manage to start thinking about their retirement now will be immensely grateful to their younger selves when they turn 65.
This savings gap isn’t just a millennial affliction.
The next generation to enter retirement, so-called Generation X (born between 1965 and 1980), has a mountain to climb too. This generation may be even worse off because they will have missed out on the defined benefit schemes enjoyed by many baby boomers, and started work before enrolment in defined contribution schemes became automatic.
Even today’s educated Generation X, currently in their prime saving years, aren’t doing enough of it. According to a YouGov study, 30 per cent of people aged 45 to 54 save none of their disposable income (CEBR 2016). There is a global funding shortfall, and it’s likely to keep growing.
Building your future
By saving more today, there will be more in the coffers for later. Sadly though, this doesn’t come without its own challenge: more in the coffers means less in the tills. More saving equals less consumption and less economic growth which won’t support government efforts to shrink the savings gap. Keynes called this the paradox of thrift.
Let’s spend less instead? Saving does not increase today, but consumption decreases tomorrow as workers start to retire on inadequate incomes. Again, reduced consumption has its own negative impacts.
There is another option: we can all work for longer and retire later. Hurrah! This will also lead to an increase in aggregate saving, but not necessarily fulfill the retirement dreams many hope for.
These are uncomfortable truths, but sooner or later the gap will have to be addressed. The World Economic Forum summed it up well: “Given the current long-term, low-growth environment, it is unrealistic to expect that saving approximately 5 per cent of a paycheck every year of your working life will provide a comparable income in retirement.”
The key question for our clients is: are you and your family members saving enough for the retirement you always hoped you or they would enjoy?
There are steps we can take, and we hope our latest InvestmentReport, Too poor to retire, will also encourage some helpful intergenerational dialogue about investing for the future (you can find it on Rathbones’ Millennial Matters hub at www.rathbones.com/knowledge-and-insight/millennial-matters-0 or on our LinkedIn page at www.linkedin.com/company/rathbone-brothers- plc/).
Pensions don’t tend to make for the most scintillating dinnertime conversation – we know our limits – but we hope this report may help to change that. Pensions need to be discussed more: if they aren’t, future retirees’ golden years may be more like tarnished silver.
Rathbone Investment Management Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No. 1448919. Rathbone Investment Management Limited is part of Rathbone Brothers Plc. Head office: 8 Finsbury Circus, London EC2M 7AZ.