Thanks to Monevator this week for pointing me toward an FT article which I would otherwise have missed, that seemingly caused a bit of a storm (or at least a heavy downpour) on Twitter. It had highlighted a calculation that suggested 25 year old Millennials will have to save £800 a month into a pension to generate an income of £30,000 a year from it when they retire. (It’s actually a summary review of an original article posted here.)
One of the funny things about this calculation is that I bet it confronts a lot of Millennials with a really uncomfortable truth: on the one hand they know that £800 a month is a serious amount of cash. It’s an amount of money that has a reality about it. Mentally, they can grasp it. That’s two months worth of weekend partying. It’s four hundred McDonald Happy Meals. Two hundred pints of beer. And they have to save that every month until they retire!
As if that’s not bad enough, I bet many Millennials will be aghast that such an immense monthly “saving” will only generate an absolutely paltry income of thirty grand a year for their retirement. Thirty grand a year?! Doesn’t Kim Kardashian spend this amount a month on her hair? Taylor Swift surely earns it in five minutes? Ed Sheeran hands this to his mum and dad as weekly digs money. Thirty grand a year? That’s almost literally nothing. Even a Millennial Junior Doctor earns more than thirty grand a year and they can’t survive on it. What chance the rest of them?
Thirty grand a year, however, still seems like a serious amount of money to me. And to the generation before me it will seem like a lottery win – my parents couldn’t even dream of earning that amount when they started out from school.
When the Millennials moan about how hard their lives are compared to The Boomers, it inspires irritated letters from their elders complaining that life isn’t all that much fun on the state pension either. Or by more affluent pensioners stating they worked, were taxed and then saved for everything they’ve got – the youth of today will just need to buckle down and do likewise.
I’ve sympathy for both sides of the argument. My son is leaving University with about forty grand of debt and will need at least another ten thousand if he wants to put a deposit down on a flat. Where is he going to get that kind of money if the “bank of mum and dad” doesn’t step in to help, if they can? Encouraging saving is one thing, but encouraging debt is a ruinous practice, and I find it hard to believe that successive Governments are fully behind it, fuelling the fire. Haven’t we learned anything?
At the same time, even diehard FIRE practitioners might struggle on the state pension, while those of us with personal schemes are chewing our nails about how much that pot is going to be raided going forward (the only guarantee is that it will be raided.)
For me, my personal pensions are now pretty much a zero sum game: the more the Government takes, the more I lose. I’m not contributing any more in and won’t benefit from any tax changes that might previously have gone in my favour as a wage earner. I’d settle for this, however, if Government would just pledge to stop tampering any more with them and allow us to plan with a bit more certainty for our future.
When it comes to pensions, time is no longer on my side (to an extent) but the combination of saving money over a long term and compound interest has served me well to date. It’s that principle that I’d like to impress upon younger people today. I’m not going to enter the debate over whether they should aim to save £800 a month or 10%, 20% or 40% of their net income – I’d settle for them saving anything out of their wage packet on a regular basis. Even a fiver a week, just to start the habit. If they can save five, maybe that will lead to ten. The important thing is to do it and never, ever stop. Just keep it going. What an advantage that will give them when they hit fifty. And think if two such like minded individuals get together and double up? Who knows how much they might accumulate?
For me, regularly saving money is the core competency that should be inculcated from birth. Or earlier. Everything else is just finesse. It seems to me that saving £800 a month is a daunting amount of money. It’s a mountain that seems so impossible to climb that you might as well not bother. Wouldn’t it be more positive to point out that if a twenty year old could save just £80 a month over their working lives they’d pick up a one hundred and sixty grand lump sum at the age of 60? Okay, I know it’s not quite that simple, you might not average a 6% return and what about inflation etc., but it’s the point that counts.
The best financial decision I ever made was almost a mistake – I signed up for my company pension on my first day at work on the advice of my line manager. My financial education up to that point had been almost non-existent. I’d no idea what a stock or share was, never mind an Index Tracker. There was one big exception to this though – I had been brought up and educated to save money. From about the age of ten, my mum took me to the Post Office every Saturday to make a small deposit in a Savings Account she’d opened for me. (It was embarrassing when she was still taking me at thirty five, but the lesson stuck.) Today it’s a lesson that still needs to be learned and practiced by just about all of us.