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Younger generations must save more for retirement than their parents

11 November 2018

Younger generations will struggle to live as comfortably in retirement as their predecessors, new research from Rathbones has shown.

The investment manager said a combination of rising life expectancy, decreasing home ownership, lower investment returns and inadequate private savings will make it much harder for younger people to be able to retire when their parents did.

The report suggested that if the current savings shortfall were to be written off without any changes to savings behaviour or stronger returns, the average retirement age would rise from 63 to 70. However, savings rates have fallen to an all-time low and expectations of how much money would need to be saved to enjoy a comfortable retirement are often wide off the mark.

In addition, UK students who graduated in 2017/18 left with an average of £51,700 worth of debt, with research showing that those with student debt accumulate 65% less retirement wealth at age 30. Coupled with defined benefit pension schemes giving way to defined contribution schemes and a collapse in annuity rates, Rathbones warned that the government appears to be “sleepwalking” into a policy dilemma where borrowing, reducing welfare or raising taxes are the only options.

Ed Smith, head of asset allocation research at Rathbones, said of the findings: “While it goes too far to pronounce younger generations ‘too poor to retire’, to say ‘too poor to retire at the same age as their parents’ seems fair.

“Unfortunately younger generations will need to either work more, save more or buy less stuff. But it’s a myth that ‘millennials’ fritter their money away on avocados and turmeric lattes. The reality is they face both lower economic growth and investment returns overall and will need to save far more than their parents did in order to achieve a similar retirement pot.”

Smith said that with cash, bonds and equities the bedrock of pension portfolios, lower returns would mean pension pots would grow more slowly over a worker’s lifetime and would therefore mean saving more.

“Allocating more to assets that should generate higher returns would help over the long run, but with higher potential returns comes a higher risk of loss. These lower prospective returns are significant, but the much bigger problem is the quantum of people who simply have very low savings to generate any return in the first place,” Smith added.

 

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