Are Millennials Saving Enough for Retirement?

Aged under 40? The likelihood of a State Pension for you at retirement is slim. So it is important you are saving now to avoid poverty in later life

Emma Wall 23 September, 2016 | 3:10PM
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Emma Wall: Hello, and welcome to the Morningstar series, " Future Proof." I'm Emma Wall and I'm joined by Tony Stenning, Head of Retirement for BlackRock.

Hi, Tony.

Tony Stenning: Hi, Emma.

Wall: So, a simple question. Are millennials saving enough for retirement?

Stenning: That's a great question and I'm afraid the answer is no. What is that? When one in four of them, according to our investor pulse survey here, suggests that it's an important criterion for them and they should be doing it and yet half of them are doing absolutely nothing for it. It's really interesting this, at least for me that we asked a number of people in the country when should you open a bank account? And they say 10.

When should you start saving for a pension? Well, 23. If only, I'd suggest because I'm afraid they are not starting at 23. They are saving for houses. I understand that. They compartmentalize their saving. But unfortunately, they are not using the one thing that they have, which I don't have so much of anymore, and that's time and you can use that to your benefit. I'm afraid they are just not.

Wall: And there seems to be then a disconnect between expectation and reality and this is not something that just millennials are guilty of. Everybody is guilty of this. Everybody who wants to have a comfortable retirement but then doesn't put away what they need to. So, if we have a look at the figures, what are people expecting from their retirement pot and their retirement?

Stenning: You're absolutely right. This is across every cohort approximately about £25,000 roughly depending on which age group. Millennials are slightly more than, £27,000 is what they'd like to have in retirement and their expectation of what the pot size would generate that for them, I'm afraid it's way off course. For the average person, they think it's about £200,000 and £204,000; for millennials £167,000 to give them £27,000.

I'd love that to be the cause and back when interest rates were double-digits, that was almost the case. And I'm afraid where interest are virtually zero, you know we are near that. In fact, you are underestimating the kind of pot size by at least half a million and if you want it index-linked, more than that. And that's a big number for people to their head around and I think it's because they are not thinking of the liability in the right way.

They think what sort of asset pot size we need to grow rather than I earn an income. That's what I do. When can I get perhaps independent to that income? When can I get to a stage where the money that I've saved pays me and I can start to downsize my job rather than downsize a house?

Wall: And so people want about £25,000 a year in retirement. They think they need to save about £200,000 to deliver that. What are people actually saving? What's the average pension pot looking like?

Stenning: The average pension pot is only about £30,000 in the country today and hasn't really much over the last few years. But then that number itself probably hides a number of things. People have more than one pot. Those millennials are probably going to have 11 jobs during the course of their career. So, you need to be able to have a way of consolidating those pensions. Technology is now coming around and will enable that. The pensions dashboard.

I think you need to think a little bit more broadly than just the pensions dashboard perhaps a retirement dashboard. I save into an ISA as well as a pension and that is for my long-term saving. So, if you can find a way of consolidating and having a view of your balance sheet, I think it just empowers people to make the kind of right decisions.

Wall: And what are some simple measures that millennials, that is, by a broad definition people under the age of 35 can do to ensure that they will have the best chance of delivering that £25,000, £27,000 income in retirement?

Stenning: So there are some really simple things here. Actually, many of them are saving probably enough to have a reasonable retirement, but they are putting it in the bank. So think longer term. Use that one thing that you absolutely have, as I said earlier, I'll say it again, I've got slightly less of it now, not quite in the millennial camp. But you use that to your benefit. Did Einstein say? Doesn't matter. Let's give it to him. The 8th wonder of the world. Use that compounding to your advantage. That time will allow you to navigate any kind of volatility in markets.

Secondly, have a plan. You got to have a plan that will allow you think longer term. Engage with parents. Engage with friends. Not just advisors, but if you do engage with a financial advisor, and actually millennials are more inclined to do that. If you do, do that, you have less of that cash that I said therefore have more invested longer term and that sets you well set for the future.

So I think it's really simple things that you can do. You need de-compartmentalize your thinking, having a plan helps you do that, thinking longer term and if we can help create an environment where you can have one simple savings pot that's very transparent, that follows you wherever you go, that's just going to help you with that decision.

Wall: And paying to what workplace pension because it's free cash from the government and indeed your employer there as well?

Stenning: Absolutely. I mean, that's the one thing everyone should do. It's free cash. Now the government won't like saying that because they are just giving you back your tax. It's free cash. So if you put your pound in, your employer puts their pound in and the government puts their 30p or 25p, whatever it is, you can get to two to two and a bit times what you'll do – what you do for your £1. So, absolutely right. That's the one thing they should definitely do before anything else.

Wall: Tony, thank you very much.

Stenning: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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About Author

Emma Wall  is former Senior International Editor for Morningstar