The odds are stacked against our kids.
- Low interest rates make paying a mortgage a cinch
- But tight credit makes getting a first-time mortgage a nightmare
- House price inflation makes first-time buying near impossible
- And pushes up rents as demand increases.
Add to this
- The drag of student loan repayments
- The cost of travel – again linked to affordability (of homes close to work)
- Falls in real wages for the under 40’s (evidenced by Resolution Foundation report)
- Pathetic yields on savings accounts
Is it any surprise then that kids aren’t saving? The financial odds are stacked against them and those I’m speaking to have little interest in playing their parent’s game.
If the ONS stats are right, it’s not just Millennials but their parents who are struggling to save. Credit cards and car finance are still are most used financial products!
The one financial windfall kids have to look forward to is inheritance , which is precisely the opposite of a savings strategy. It’s a “sit tight and wait for mental and physical collapse” strategy. Look at the Royal Family – it’s high risk.
Frankly, if I was a kid, I would struggle to rationalise saving. My reason for saving would be abstract, something along the lines of “keep saving and it will be alright”. This is pretty lame but it’s hard-coded into most young people’s financial DNA.
Let’s not lose sight of that.
The answer is not “better products”
The savings products we have – primarily workplace pensions but also directly purchased ISAs, are now fit for purpose – even good value. The financial services industry services the needs of savers, but does not inspire them.
Young people will not be inspired by the old people to save, my analysis above suggests that young people see old people as the problem.
The answer is …… regular savings over time!!!
The regular payment of at least 8% of earnings into a non-spendable savings pot will create a pot sufficient for market growth to get to work. Over time, the money kids will save into workplace pensions will build into an appreciable sum. A 22 year old on average earnings contributing 8% of the band can expect to have saved £20,000 by the time they are 30.
This is a tangible amount of money, a genuine achievement which will be a reality for most young people enrolled into workplace saving. It is enough money to attract the attention of young people. It is an amount that could have genuine interest. The Australian experience shows that once you’ve saved more than the cost of your car, you start getting proud not just of your savings, but yourself.
This is why it is so great that after all the time between conception and implementation, auto-enrolment will soon be universal (at least for employees).
The young do not opt-out
The answer to the question raised in the blog, is not to make it attractive to save. Young people when they think about it, see savings as deeply unattractive.
The answer is to make it easy and normal to save, which is what auto-enrolment is doing.
The small payroll tax which is the AE contribution is about to get bigger in April and bigger again in April 2019. But I don’t see the hikes in contributions as an issue.
That is – provided we can give young people some genuine feedback on what their financial sacrifice is producing.
Critical to this, we need to get young people easy access to their balances with hopefully some good news , that their pots are worth rather more than their contributions.
Bad news is better than no news!
But even if the news is awkward , we need to tell it to savers as it is. Most young savers are in global equity index trackers which have done brilliantly over the period of auto-enrolment so far.
But a reversal in the speedy growth in equity valuations (plus the kicker of a weak pound up-valuing overseas equities, is very likely.
We should not shy away from delivering bad news as well as good. “Over time” means over decades and the impact of workplace savings will on individual financial self-esteem is still a decade away. Over that time there will be plenty of market crashes.
We cannot immunise people from the short term shudders of frightened markets.
Fiduciaries must emphasise the positive
We must point out the key savings messages
- The tax advantaged savings system into which AE contributions are paid
- The quality of the savings vehicles available from employers
- The ease of saving through payroll deduction
- Ready access to performance data showing how investments are doing
- Information on how the invested money is being put to good use
We do not need to ram this stuff down our kids’ throats, but we do need to emphasise the positive.
In this, the IGCs and trustees should be key. They – not the providers – should be the key messengers, for as independents, they are able to provide a balanced and authoritative view.
But not shy away from reality.
The messaging needs to be absolutely clear. There are no short cuts- no pension holidays- no postponement of contributions.
Months when money is not saved is ground lost , that can only be made up by paying in more in future years.
There is a cost of delaying contributions and we should not be shy of pointing this out.
We owe it to our kids to be honest about saving. There is no get quick rich here. This is not about 1m hits on you tube and instant fame and success. Getting savings right is a lifetime thing.
In my recent conversations with those under 30 about saving, I get one over-riding message.