What the future might look like…..

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.

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…..

1. 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).

2. 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!!!!

3. 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……

4. 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……??

Conclusion

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 research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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6 thoughts on “What the future might look like…..

  • A excellent article which probably sums up the issues for the next generation perfectly.

    Unfortunately I think the suggested solution of IFAs advising these people is somewhat flawed.

    First you have the issue of numbers, a shortage of qualified IFAs; i.e. approximately 20,000 IFAs is not sufficient to seriously address the problem.

    Given the pressures on the next generation identified in this article, coupled with Auto-Enrolment taking care of their basic retirement planning, these people are unlikely to ever be profitable clients for the typical IFA.

    As most advisers are in their 40s, 50s or 60s I would suspect that most would be planning to have hopefully retired before the next generation even approach profitability.

    Consequently in the post RDR world, 10-20 years of ‘free’ advice combined with the unlimited and open ended liabilities (that will haunt the adviser in retirement) for advising them to ‘opt-out’ of their Auto-Enrolment (in favour of saving for a house deposit) would be rather imprudent to say the least.

    I’d like to have a rosier view as I worry about my own children’s financial future but I think the solutions are more likely to be via financial education within schools and the workplace.

    Reply
    • Hi Scott, I suppose my point is that I don’t necessarily know the right solution and I agree to offer ‘free’ advice comes with challenges. But the consequences of doing nothing is greater.

      When I listen to people saying how wonderful pensions are now I think they are missing the point. It is great for those who have them and are close to retirement but for those starting out the challenges are much greater than anyone wants to admit.

      Financial planners are in a great position to educate the children of clients and help and guide them. However, this is a limited market and care would need to be taken.

      Giving free advice seems madness but long term it may pay it just has to be offered to the right clients.

      Education at school and the workplace is key but the question is who will do this!!!

      Very challenging times and I would love to see someone in power take this up because this is the real challenge!!!

      Reply
  • Not sure of your point or where you want to go with your argument.

    Thankfully for mankind retirement is not something which occupies most young peoples thoughts.

    Not everyone does or even wants to live in London which is presumably where you get your housing costs from.

    Most of us at 18 spent whatever money we had having fun giving no thought to next week let alone the next 40 years and no doubt this pattern will repeat into the wild blue yonder.

    Human nature is not inclined to Lifetime Cash Flow planning and will generally feel content if the next winter is provided for but you seem to be seeking a different species for your work.

    Lighten up as the world is a wonderful place full of people who understand the problems brought about by dying too soon or living too long. What is needed are advisers who can adapt rather than advisers who expect people to adapt to them.

    Reply
    • Hi Phil, the figures were based on Bristol. London is almost a separate country and would almost need a separate discussion.

      My point is that the financial world needs to look outside of the box when it comes to planning and yes I agree they need to adapt to the world around them rather than expect people to adapt to them.

      I don’t know the perfect solution and the article is to spark debate. Retirement may not occupy a young persons mind and that is good to some extent. Of course as an 18 year old we want to explore, push boundaries but 20 years ago we could do that without a care about our pension because many of us had guaranteed pensions paid for by our employers.

      This no longer exists (unless you are lucky or in the public sector), and retirement as we know it will be different. We can say well it doesn’t matter you can worry about it in your forties but the reality is that now if you get to 40 and have done nothing then financial planning becomes much harder.

      Will a state pension exist when today’s 18 year old’s come to retirement, will they be able to buy a house or will they still be paying rent into their old age.

      Over the last few years we have lost the art of basic budgeting, we want everything now. I am not old, I have spent the last five years in and our of work. I am one who ignored budgeting and and planning. Budgeting had to happen to ensure we kept a roof over our head. Planning now has to come if we are to have any money in retirement. Am I too late, potentially yes.

      One thing I have learnt through all of this is that it is really hard for people in the real world and sometimes we forget that (because we have not experienced it).

      I agree the world is a wonderful place and one to enjoy but to ignore reality is dangerous. Education at school, workplace and even the kids of clients is a really positive step!!

      Anyway I will come of my soap box now!!!!!

      Reply
  • Great article. It is all about educating our 16-18yr olds. How we go about doing this, I haven’t a clue, but there must be some way we advisers can impart our knowledge to effectively, our childre.

    Reply
    • Hi Victor, thank you. Its really hard and I just want to spark debate and perhaps others may have ideas.

      Reply

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