A recent survey by Blackrock’s Global Investor Pulse showed that young people aged between 25 and 34 have a stark problem. They believe they need at least £54,000 to live on in retirement. That’s fine; except for the fact that they also believe they need to accumulate a lump sum of £375,500 in order to give themselves this income in retirement.
This size pot currently gives at best an annual income of just under £13,000 assuming one opts for RPI indexation to stave off inflation. And that’s just a single annuity – a joint life version would drop the amount below £10,000. In fact, Blackrock showed that to meet their required level of income, those savers would need to have accumulated a pension pot of over £1 million.
The fact that the young people surveyed were so far out in their estimates of the pension pot they needed shows that they have a complete lack of understanding of financial matters. This is shocking in such a key group, i.e. those who have just entered the job market and started earning. This is also the group of savers who can benefit most from compound interest and who have the profile to take the most risk in investment. Yet their perceptions of what they should be aiming at are wide of the mark.
The problem is not localised to the UK. The survey was carried out across 6 countries; the UK, Germany, Switzerland, Italy, Netherlands, and Belgium. This puts at risk all the efforts being made in western economies to start the young saving earlier for their pensions, thereby reducing the weight the state will have to carry when this cohort move into retirement. If the younger generation has no real conception of the target, how can they possibly hope to achieve it?
The biggest difficulty is that this is the age group most focused on consumer goods and travel. They are earning their own money for the first time in their lives and they feel justified in spending it on themselves. They are far too optimistic about how easy it is to provide for old age and therefore they are not energised to make the proper preparations.
Clearly the education system is failing young people completely, when it comes to personal finance. Over-focused on educating pupils to become active members of the workforce, it does not spend anywhere near enough time in educating them on how they should handle the proceeds. In particular the need for retirement saving has to be brought out in a way that young people can understand. They need to start saving from the very beginning of their earning career.
We all need to wake up to the urgency of educating the young throughout the school cycle about financial matters, even if it means bursting the bubble of optimism. Giving the youth clarity about their own need to provide for themselves financially throughout their lifespan is a vital step. Otherwise, the next generation will just repeat the mistakes of the last and end up wondering why they don’t have sufficient income to enjoy their retirement.
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