In my last blog I challenged the thinking on retirement, in this blog I want to highlight a consequence of misguided thinking.
Chasing the dream
Most people dream of retiring at 55 or 60, their parents and grandparents did and they assume the same will be true for them.
But there are challenges that the previous generation never faced (although they may be facing some of them in retirement), and which the new generation now face.
1. Housing – catch 22 is the best way to describe what young people are facing. House prices are at an unprecedented high. The desire to own a house is all consuming and every spare bit of cash goes towards achieving that dream. The demand is such that more houses are built, the cost rises and dream drifts further away.
To save means that we need to reduce the cost base at the start to save the money and achieve the dream. The challenge is that renting a property is as expensive as paying a mortgage, if not greater, meaning even if people wanted to buy they can’t because the rent is consuming their capital (unless of course they live at home!)
The houses which are being built will ultimately end up going into the rental market which only benefits the few.
If people never get on the housing market they will be paying rent into retirement which their parents and grandparents never had to do. This is a more a European thing as home ownership in France / Germany is very low in comparison.
2. Funding the dream – guaranteed pension schemes were fantastic. In fact for some people it was totally funded by their employer. With the exception of public sector schemes there are very few guaranteed pension schemes and they are unlikely to be free.
Using crude and basic assumptions – if an individual takes 5% of their savings each year to provide for retirement then even an income of £10,000 a year would need a fund of £200,000 (that assumes no inflation). The reality is that the pot needed to provide even a normal retirement income would be significantly more. To provide for that pot depends on the age the individual starts to save, when they want to retire and investment returns.
The reality is that it will not be cheap.
Individuals have to accept that something has to give; we can’t dwell on the past.
This time next year…..
Whether we have watched it or not most of us know the famous line ‘This time next year (Rodney) we’ll be millionaires”.
One fundamental shift in the last few years is the increased opportunity to risk everything for the ultimate get out. Online gambling with large sums makes it easy for those looking for a quick win to take the risk without considering the consequences. Online casinos are not weighted in the players’ favour; the odds are greatly against them. An early win will mean the player thinks they can beat the system; subsequent losses follow and continue because they believe they will win again. Those that lose at the start continue to play in the belief they will eventually win.
The lottery started at £1 for one game, that’s £52 a year. Now there are three games at £6 a week that’s over £300 a year. Individuals will gamble more because they believe the more they gamble the more the chance of winning. The odds of winning the jackpot are about 1 in 14 million. Even if you do win you may have to share your winnings with others.
Individuals become more desperate to achieve the ultimate pay-out, but for many the reality is just broken dreams. More don’t win than do – the odds are firmly against the gambler.
Investing can be similar…..
Over the last five years with careful stock picking it has been easy to make money. Good quality companies saw their share price decimated in 2008 – anyone picking the right company could see 100% plus returns. But fear of what had happened drove most people out of the market.
Seeing these golden returns investors have started to return just at a time when this run is slowing. The returns are likely to continue but they will be lower and more volatile. This means investors have to accept short term losses before they see the long term benefits.
If we accept that everything is changing then we need to do something about it. The problem is that for many of us it is too hard to contemplate.
There are good reasons for this, many individuals have suffered redundancy, unemployment, stagnant wage growth etc over the last five years. Low interest rates might have helped but the reality is that even now many are treading water and this leads to desperation.
We will take risks which we would never in the past conceive of doing. Gambling seems a simple solution, but for many, lots of money is wasted for little or no return. Investing is a form of gambling.
If we invest in shares very few will do the research first, just blindly following the stock picks journalists recommend. It means we don’t understand the stock. When it rises we think we are amazing investors, when it falls we panic and often jump ship for the wrong reason. As we lose money which we are saving for our retirement, our behaviour becomes more erratic in the desperate hope that we will land the big one…..
And so the cycle goes round.
The challenge is to politicians and industry experts, this is not over egged. This is reality; retirement savings is not just about a budget gimmick, it’s not about overhauling what we have. It’s about considering the future, how our habits have changed and then delivering a solution fit for purpose even if that is uncomfortable reading for many.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.