In my last series of articles I suggested we need to radically re-think how we plan and view retirement for the next generation (those leaving university or school).
My view is that we need a blank sheet of paper and build from there. I can’t propose solutions but I can look at the challenges from the view point of myself an 18 year leaving school and home in 2014 (I actually left school a few years before this!)
These are some of my observations…..
- A job……assuming I can get a job a starting salary of £12,000 is not unrealistic but I need a career where the salary will increase not stagnate. That gives me around £920 per month after tax (assuming I am not paying into a pension scheme).
- Somewhere to live…..assuming I choose to leave home then the cheapest option is to rent a room in a shared house which will cost me around £250 per month (plus bills). That leaves me around £670 p.m. to live on. This has to cover the bills, travel, food, socialising etc. To rent a small one or two bedroom apartment will cost around £700 – this is not an option!!!!
- Home ownership……to get on the property ladder a one or two bedroom apartment will cost a minimum of £100,000, a more spacious property £150,000 plus. Assuming house prices remain static over the next four years to get a 10% deposit will mean saving around £200 p.m. The cost of the mortgage will be around £530 p.m. So assuming I can save then I could have a small apartment by my early twenties. If I get a two bedroom apartment I can rent out a room tax free and reduce my outgoings. At some point assuming I meet someone, have children I will want something bigger and that will cost me around £200,000……
- Planning for retirement…. I know the importance of saving now. If I target a retirement age of 65 and an income £10,000 (assuming no inflation) then it will cost me £380 p.m., if I delay retirement to 75 it will cost £230 p.m. With the focus on a house I possible won’t start saving until I am 28 at the earliest. On the same assumptions to retire at 65 will now cost me £495 p.m. and 75, £285 p.m.
The list is not exhaustive but it outlines some of the challenges, so how do we respond to the 18 year old?
At a glance…..
The figures show that to achieve the goal of home ownership means that the focus has to be on saving for the deposit and any thought of retirement is just that a thought. Even if the salary increases all that does is increase the available cash to purchase a property.
Another option would be to rent, but the cheapest apartment is around £700 p.m. – doing this would significantly remove any chance of saving for a property in the future. If they don’t buy then they would still have to pay rent in retirement.
Something has to give…….
Today an individual reaching 65 is expected to live until they are nearly 85. In 1945 an individual reaching 65 was expected to live until 65 / 66!!!!
To suggest we work till 85 seems crazy but it is no different to suggesting we worked to 65 in 1945.
Individuals need to re-think their view of retirement – perhaps working part time as we get older is a form of retirement. If we are fit and healthy why stop!
Of course some dream of that hefty inheritance – the saving grace.
Think again – assuming in this example the parents are 45, then they are potentially going to live for another 40 years. This means that the 18 year old wouldn’t see any money until they were nearly 60. We also have to accept that as we live longer more of the money will be used, for example nursing home fees etc……it is therefore fair to assume that the ‘big’ pay-out might actually be relatively small….
How does an 18 year old get advice…..
The million dollar question……they have no money….the assumption is that they will be financially savvy enough to work it out….
If we think of ourselves as 18 year olds how savvy were we.
The reality is that the majority need help and I think there is an opportunity for financial planners but they need to look long-term.
If financial planners offered free guidance to children of clients to help and steer them then I think this would have a massive impact. It’s radical because what we are saying is that as you guide and lead them you make no money. But in ten, fifteen or twenty years as they start to save, get money and even inherit the payback will come.
It’s one thing direct providers cannot offer…..and its radical, something for nothing, madness….but is it……??
I haven’t tried to consider products because to me that is pointless. The starting point is guiding young people through life stages, whether that is initially saving for a home or when they first start to plan for retirement. This might need to be free but only then can financial planners develop a relationship which will be prosperous going forward.
Note: house prices, rent etc are based on prices in Bristol and will vary across the country. The mortgage is based on a 5% interest rate. Contributions to fund retirement are a guide only and will depend on a variety of factors.
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