Retirement can seem a long way off when you are fresh out of university or embarking on the first steps of an exciting new career. Phrases such as YOLO (You Only Live Once) are also encouraging us to live for today rather than plan for tomorrow. So, what does this behaviour mean for the future of today’s millennials?
Many existing pensioners built their retirement wealth through final salary pensions and state benefits, which have all but disappeared and were designed when life expectancy was shorter and there were roughly four workers for every retiree; now there are between two and three. And whilst millennials can expect to live longer than previous generations, their savings are not rising accordingly, meaning they may need to work into their seventies or eighties in order to match their parent’s retirement lifestyles.
Time for some good news – with a bit of careful planning, it is not all doom and gloom for the young adults of today.
As mentioned previously, auto-enrolment has helped to make a significant impact on people’s pension pots, particularly the under thirties, who have the lowest opt-out rate across all ages. However, a contribution rate of 8% of salary will not alone deliver a comfortable long-term retirement for many. Self-employed workers, who do not benefit from workplace pension schemes, are also a concern.
Nathan Mead-Wellings, Director at Finura, comments: “Whilst auto-enrolment and the new flat rate pension will create some winners in retirement, the reality is that millennials need to save more and do so as early as possible in their working life if they are going to achieve a comfortable lifestyle in retirement. New technologies, such as the pension dashboard, are useful tools in helping young people to visualise where their pension finances are at but, if they don’t know how to respond and take action when there is a shortfall, the information is of no real value.”
Here are some tips on how to set the right foundations for a better retirement.
Popularised by Senator Elizabeth Warren, this is a popular rule for breaking down your budget. It involves allocating your after-tax income to 50% “needs”, 30% “wants” and the remaining 20% to savings. Needs include bills that you have to pay, such as your mortgage, rent, insurance and utility bills. Wants are items that are not absolutely essential, including dining out, holidays, the latest mobile phone and TV streaming services for example. The remainder should be allocated to savings and/or making investments. Debt repayment can also come under savings; while minimum payments are part of the “needs” category, any extra payments can reduce future interest owed, so they are also classed as savings.
With student debt acting as one of the key financial obstacles for today’s millennials, the sooner it is paid off, the sooner you can start planning, and saving, for your future. While the lower monthly payment options may seem more attractive – particularly to help fund some of your YOLO lifestyle choices – you will end up paying more money back via interest over the lifespan of the loan so it is beneficial to start paying off as much as you can as early as possible.
If you can get into the habit of following the 50/30/20 rule, this can help to provide a buffer fund to help you cope with any unexpected outgoings. If you cannot, consider selling some unwanted items online or analysing your previous bank statements to see where you spent your money and if you can make any obvious savings. As a rule of thumb, you should aim to have at least three months’ salary saved up.
Unfortunately, whilst we are trying our best to live for today, the worst can happen. Ensure that one of the outgoings in your “needs” category is life cover which will cover debt such as mortgages, personal loans and credit cards. Life insurance is relatively inexpensive if you start the cover early, allowing you to make saving over the longer term.
If you have any surplus income or savings or wish to increase the amount you save towards your pension each month, then you could benefit from investing some of that money to help achieve your medium to long term goals. However, this should only be considered if you are happy for the money to be tied up for between three to five years. If you do take this decision, ensure you have a diversified portfolio to help spread the risk and be sure to check the costs, as these can have an impact on the overall performance of investments.
As with any professional service in life, be it accounting, legal advice or financial advice, you could benefit from the knowledge that an expert can bring. A financial adviser can offer a very personal service, that online investment platforms cannot; they will talk you through your options and help you to put a plan in place that will ensure you reach your financial and lifestyle goals over your lifetime.
If you would like a review of your finances or pension plans, please contact Finura.
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