Pensions: Why forecasts suggest millennials should invest
PUBLISHED: 10:33 21 September 2018
Following an extended summer break, Peter Sharkey returns with his popular personal finance column - and some good news for millennials.
You may have seen a raft of gloomy reports a few weeks back following the release of figures by the Office for National Statistics (ONS) which suggested that by 2066, around 25% of the population will be ‘retired’. Commendably, most reports urged 20-year-olds to start saving for retirement, although the problem with the ONS forecast is it assumes the official retirement age won’t budge over the next 48 years, a supposition which can only be described as flawed.
In all probability, by 2066, today’s 30-year-old will have been officially retired for three years, although most people currently in their twenties will still have a few years to go before they too can call time on their full-time working careers.
Yes, I’m afraid you can expect the official retirement age to continue its inexorable upward march, while for those optimistically expecting the state pension to exist in anything like its current format half a century hence, I have some bad news: it won’t.
We already know that, according to the government’s own advisers, the National Insurance fund will run dry in 2032-33. We also know that if the state pension is to exist at all 15 years from now, successive governments will have to:
a)Increase NIC – perhaps finally admitting that it’s an income tax by another name.
b)Inject billions of pounds every year to keep the National Insurance fund afloat.
c)Continue moving the official retirement age upwards.
Sobering thought, eh?
Perhaps mindful of this rather cheerless scenario, the people behind the MoneyMapp.com website have come up with an innovative feature. They’ve created a Pension Clock providing a countdown to April 2033, the point at which the National Insurance fund balance is currently expected to fall to zero.
Site visitors type in their current age to see how old they’ll be when the money has been spent, after which they may calculate how much they could accumulate if they start investing as soon as possible. Simply type in what you can afford each month and MoneyMapp.com does the rest, simultaneously highlighting the miracle of compound interest.
The figures below show that a 25-year-old saving less than £50 a week could build a savings pot, in an ISA perhaps, valued at £59,854 by 2033. Someone who is currently aged 45 and able to save £400 a month could have accumulated £119,709 by the time they’re 60.
The totals provide an idea of what can be saved in the space of 15 years simply by setting aside relatively modest sums each month and letting compound interest do the rest, but where to start investing?
If you’re an investment beginner, the prospect of investing can appear a little daunting.
Indeed, you may have heard that the process is complicated because it involves accepting enormous risks, but such views are misguided. It can be complex; it can be risky, but it can also be very simple and provide you and your family with financial security for life.
As if to emphasise the point, you may, for instance, invest in an ISA with just £1. Granted, saving £1 a month won’t get you anywhere fast, but once you’ve opened an ISA account, you’ve effectively created an investment platform. Moreover, you can have your savings invested in a ready-made portfolio that matches your attitude towards risk.
It’s important to acknowledge that whatever category of investor you consider yourself, the process of investing involves taking on some degree of risk.
However, it’s also worth noting that keeping your savings in cash can prove costly, even when inflation appears relatively benign.
Insurance company RL360 calculate that if annual inflation averaged 3% over the next decade, today’s cash savings of £1,500 would be worth just £1,116.14 in 2028. Even if inflation remained steady at its current rate of 2.5%, someone with £2,500 in cash savings would find they were worth almost 31% less (£1,726.16) in 15 years’ time.
These stark reminders of inflation’s corrosive effects strengthens the case for investing.
The next step? Find a company that seeks to avoid the most volatile stock markets and offers a range of investment portfolios designed to suit everyone from cautious or ethical investors, to others who willingly apply the ‘adventurous’ label to their attitude towards investing.
Whichever type of investor you are, as the NI fund is scheduled to run dry in 2033, you’re likely to find that the when that happens, your decision to invest today has paid enormous dividends.
The week in numbers:
Despite our glorious, extended summer, the UK is home to 3,116 fewer bars and restaurants than it was 12 months ago. Sad.
Uber, the taxi-riding app, is expected to be worth around $100 billion when it floats on the US stock market next year. The firm currently operates in 785 cities, has 12,000 staff and more than 2 million freelance drivers.
According to the BBC, the 2007-08 financial crisis has left people aged 30-39 worst off. Compared with a decade ago, their wages are, on average, £2,100 lower than they were in 2008.
Sum offered to Premiership Rugby by private equity group CVC for a 50% stake in the business. Commentators believe the figure is at least £125 million too low.
For further financial advice take a look at Peter’s column,The Week In Numbers.