It’s quite interesting reading some of the articles around at the moment regarding problems for the younger generations today. It seems as though priorities and squeezed disposable income are something new, when in reality most generations have faced financial difficulties through their lifetime. There are always exceptions to the rule, so I apologise in advance for generalising.
The older generation had lower house prices, but high interest rates and inflation (and I mean high - for those of you young enough to not realise, they both came in double digits). Equity markets boomed and crashed, jobs were expected to be for life.
One of the biggest fundamental differences though is the responsibility for retirement provision. This has very firmly moved away from the employer responsible Defined Benefit (DB) schemes, to employee responsible Defined Contribution (DC) schemes.
The difference here is that a DB scheme promises a retirement income whereas a DC scheme promises a contribution, but not what you might get back at the end of it. Thinking rationally, the contribution rate an employer offers for a DC scheme is unlikely to be the equivalent of a DB scheme, otherwise the employer would continue to fund the DB scheme.
Therefore, an employee is likely to need to contribute more as a percentage of salary than would have generally been asked when employers were funding DB schemes.
One of the biggest problems I come across when talking to individuals about their retirement income, is that they assume that as they have a pension, it will be enough.
In other words, there is an element of trust that their employer is putting a scheme in place that is sufficient. But, this brings us to the big question, what is sufficient?
Few people, unless they are a whizz on Excel and have the inclination to work it out, know what they need as an income when they are no longer working, let alone the actual value of savings and investments needed to provide this level of income.
Plucking a nice figure out of thin air is generally unrealistic. Let’s put this into context: nowadays, we study for perhaps 18 years, we want to work for maybe 44 years, but expect to be retired for 30 years.
Why do we expect to be able to save a small proportion of our savings over a relatively small period of time, but think we will have enough income to live the same lifestyle for in retirement?
Hearing that today’s 25-year olds need to save the equivalent of £800 a month over the next 40 years to retire at 65 is a difficult message to take on board. But it is essential if they want to maintain a life where they are able to do more than just the basics - in other words, let the fun carry on into their later 60s, 70s and beyond.
These five points are worth remembering:
1. Be realistic in expectations. If you earn £20k pa now, don’t expect more in retirement.
2. A good target income would be 50 per cent of your current salary, bearing in mind ideally the mortgage is paid off now.
3. A basic rule of thumb would be to save 15 per cent of salary each year over a person’s lifetime, paid into a retirement fund. Some of this would ideally come from an employer.
4. Pensions are not the only way of saving for retirement - ideally you would have a mix of ISA/investment and pension.
5. Don’t forget the state pension, it does form a good base but it may come in later than your actual retirement.