Millennials are old. The most senior in this demographic cohort are now in their early 40s and many will have careers, mortgages, children and may be starting to plan for the rest of their lives.
Maybe they hope to follow in the footsteps of their grandparents and parents. Logging off work for good, they’ll dip into their pension pot and enjoy a holiday somewhere warm or finally take up that long-delayed hobby. I’m here as the ghost of retirement future to tell you that there’s a strong chance this won’t be happening.
According to Which?, an individual or couple respectively need £19,000 and £26,000 a year to enjoy a “comfortable retirement” comprising regular short-haul holidays, hobbies and the odd tipple. However, the problem facing millennials is that their private, workplace and state pension pots are all likely to be less full than those of previous generations.
The rule of thumb with pensions is that it’s best to save as much as you can as early as possible in order to make the most of the eighth wonder of the world, compound interest. But try applying this guidance during a financial sector crash, a pandemic and a cost of living crisis. It’s not surprising that only about a quarter of millennials have done “a great deal of planning or thinking” about retirement when it costs so much to live in the now.
Exorbitant rents and house prices have caused delays in saving for retirement, and pose an ongoing threat to financial stability in the future. According to the comprehensive Resolution Foundation intergenerational audit, the proportion of millennial family units living in the private rented sector at the age of 30 is more than three times the rate of the baby boomer generation – and they are paying more. After retirement, lifelong renters will need an extra £9,000 of annual income to cover costs compared to homeowners.
Higher earners able to save for a deposit, or those who received help from the bank of Mum and Dad, may be better off than renters thanks to owning an asset, but they’re not in the clear. Large mortgages will leave them financially vulnerable to rises in interest rates and falls in house prices. First-time buyers borrow on average more than three and a half times their incomes, and as a result will be hit hardest by recent increased interest rates: someone who bought a property in 2022 on a mortgage that would have seen them paying £74,000 in lifetime interest costs (if interest rates had remained at pre-2022 levels) could now end up paying £153,000. If house prices drop, as they are expected to, young people earlier on in their mortgages are more likely to end up in negative equity.
And this is before we get into the cost of living crisis, with four in 10 adults not expecting to be able to save money in 2023. After housing costs, childcare is one of the major pressures facing young families today. Between the end of parental leave and free hours kicking in between two and three years old, parents have to scrape together about £1,000 a month to put their child into a full-time nursery place. In some cases it makes more financial sense for one parent to give up their job and look after their children than it does to stay in work. This means less money is put aside each month for pensions, and also that more parents - and let’s face it, mainly mothers – will leave the workforce and stop contributing to workplace pensions.
Luckily – and take the good news where you can – millennials have been automatically enrolled into workplace pensions, meaning more people will have some sort of pension pot. The downside is that these pensions are less generous than the ones currently enjoyed by baby boomers. Our parents and grandparents were more likely to have been offered final salary pensions. Now, most people are offered defined contribution schemes under which your money is invested and what you receive depends on how those investments have performed. Funds go up and down according to the vagaries of the markets, leaving millennial pensions more vulnerable to financial shocks.
Maybe it’s not all bad news that millennials are going to be working until the age of 67 and potentially 68, according to recent reports. However, with an ageing population, there will be more people drawing down a state pension and a chance that the amount given to each individual will be reduced unless taxes are increased.
Of course, a frugal retirement won’t be on the cards for everyone. It will become increasingly clear who the millennial haves and have-nots are – as already seen around home ownership – as wealth is passed down from generation to generation.
When I put this scenario to the head of the all-party parliamentary group for pensions, Nigel Mills, he suggested financial innovation may be the key to solving this ticking timebomb. It seems like an overly complicated solution to an obvious problem – millennials, and in turn younger generations just behind them, need to be able to save some of their cash in the here and now.
Wages should be increased. Rents need to be capped or controlled. House prices need to be stabilised to allow wages to catch up with prices and to avoid those who bought at the peak falling into negative equity. It may sound like a lot to ask, but the writing is on the wall: if this government doesn’t fix the problem, then another one further down the line will have to.
Kirsty Major is a deputy Opinion editor for the Guardian
