New research has found that an overlooked "sandwich" generation is saving surprisingly little for retirement
Young people between the ages of 25 and 34 are often singled out as being the most hard done by in the UK today. Rates of home ownership within this group have fallen dramatically since the early nineties, leading many millennials to look at their older relations with envy.
But new research suggests that those who are now between the ages of 45 and 54 aren’t finding things so easy. Those who belong to the “sandwiched generation” – so called because they face a perfect storm of financial pressures, which include supporting children, ageing parents and other demands simultaneously – are more likely to be saving nothing for their retirement than any other age group.
So forget the second-hand Porsche. If you're middle-aged and living in the UK, you probably can't afford to have a costly midlife crisis.
The other squeezed middle
On average, sandwiched savers face a massive pensions shortfall of £370,000. And their time is running out. A 50 year-old who intends to retire at 65 has just 180 more pay days left to make up the deficit.
The study, carried out by wealth manager Brewin Dolphin and the Centre for Economics and Business Research (CEBR), found that 30 per cent of this group are saving nothing at all, 19 per cent save less than 5 per cent of their net income, and 65 per cent say they have no spare cash to set aside.
They are also unrealistic about how far their savings will go in retirement. According to Brewin, 45-54 year-olds expect an income of £25,000 to be sufficient for their retirement. Assuming a state pension of £8,000 a year, £17,000 would still be required. They think that a pension pot of £252,000 would be enough to cover this. At today’s rates, they would need to have saved more than double that amount – £530,000. The estimated pot size of this group is just £160,000 on average.
Of course, expectations for retirement income differ between different age groups from survey to survey. One conducted by Skipton Building Society found that the sandwiched generation had lower expectations when it comes to the retirement income they assume they’ll need – just £21,586 a year, a markedly lower figure than the £36,626 which 18-24 year-olds believe would be adequate.
Their conservatism may be down to their maturity. The 18-24 year-olds quizzed by Skipton also expected a better lifestyle in retirement and were less willing to sacrifice on holidays, for example. And these young people may adjust their expectations later in life.
But what is striking is just how sandwiched today’s 45-54 year-olds feel. The Brewin and CEBR research reveals that almost half (48 per cent) expect to support their children, grandchildren or other family members with “substantial financial support” at some point in the future.
It is not a phenomenon confined to lower income households either. More than a third of sandwiched generation households with a combined income of between £70,000 and £100,000 say that they are either “getting by”, “making ends meet” or “struggling”, compared with 64 per cent of the total group.
It is no secret that the costs faced by parents in the UK have been rising. Another study conducted by the CEBR last year for insurer LV= found that the basic cost of bringing up a child from birth to the age of 21 – the age at which many students graduate – went up by 63 per cent between 2003 and 2015, to almost £230,000.
Those who wish to have their child educated privately are facing even steeper costs. The price of a private education in the UK has risen by an average of 20 per cent since 2010 alone – four times the rate of average earnings – according to Lloyds Banking Group. Schooling in London is even more expensive than the national average.
If that wasn’t bad enough, the costs of care for the elderly are also rising precipitously. According to Paying for Care, a not-for-profit, residential and nursing care in the UK costs £39,300 on average, and even a new £72,000 cap on what residents pay would not cover board and lodging. So even if the sandwiched group doesn’t have to shell out to pay for their parents’ care, they may find their inheritances depleted.
All this pressure may be taking its toll. Research by Bupa in 2013 found that anxiety was most prevalent among people of this age, with half describing themselves as currently suffering from stress, compared with 38 per cent among the over-55s.
So what can the sandwiched generation do?
Skip the morning coffee
Almost a quarter of the 45-54 year-olds surveyed by Brewin said they planned to use inherited wealth or property to fund their retirement. But downsizing is not always easy, especially because this group is more likely to have adult children living with them than their parents’ generation. Selling a house can be struggle. And if their elderly parents have savings and property worth more than £23,250, any expected inheritance will shrink to pay for care services.
Pension saving is often the best method to save for retirement, and the benefits of tax relief can still be considerable, even if you start saving at 45. “The financial effect of small sacrifices made now will be multiplied in a pension over a 20-year term, thanks to potential investment growth,” says divisional director Liz Alley.
Cutting down on day-to-day spending can seem like a chore, but the benefits of compound growth over the 20 years even on small amounts shouldn’t be ignored.
Brewin calculates that if a 45 year-old saved £2.50 a day – the price of a coffee – they would accumulate £625 a year. If saved into a pension, and benefitting from even basic rate tax relief (20 per cent), that sum would have grown to £23,915 by the time they reached 65, assuming annual growth of 2 per cent, and inflation of 1.6 per cent on the price of the coffee.
Foregoing bigger purchases will obviously save you even more. Giving up a second holiday every year for a decade between the ages of 45 and 55 would boost your pension pot by £52,726 by the time you reached 65, assuming the average trip costs £2,580.
Some expenses are unavoidable. But there are ways to cut down on the total bill for a private education, for example. The Killik Private Education Index shows that keeping a child in a state school until the age of 8 would knock off £97,000 – more than a third – from the total.
The bottom line is that this group may have to stop being so generous. Brewin’s research found that 41 per cent of the sandwiched generation said they would help family members get on the housing ladder. The same number said they would help to pay for a wedding which was not their own.
Anyone who has reached their earnings peak should be saving more than ever. We might be working longer, but we are also living longer. Maybe millennials don’t have it so bad after all.