It is becoming increasingly clear that someone in their twenties now might have to work until they are 70 before they are eligible for their state pension. And if this is the only income they can rely on, it will mean working longer than that.
Very few, I warrant, could live on £159.55 (the new state pension introduced on April 6th 2017), so the answer is to start saving as soon as possible. Whilst many young people would prefer to spend their money on other pleasurable and exciting things, they should ask themselves what sort of retirement they want to look forward to and how they would expect to fund such a lifestyle.
Given my knowledge and experience of the future generations and those in retirement, these are the top 5 most valuable activities young people should do right now to start preparing.
- Write down your goals, both for the short term (one year) and long term (three to five years). Where do you want to be in that time, both personally and career-wise? Review them every year, with your partner too.
- Consider the challenges, obstacles and opportunities you may encounter in achieving those goals. For example, will you need to obtain additional qualifications to further your career?
- Start budgeting and keep a note of what you spend and how much you could realistically save. There are plenty of apps to help with this so you can do it on the go. Start small and save cash to begin with until you have a reasonable buffer. Investing in the stock market is for the longer-term and money you should not need to call on in the short term.
- Critically appraise what you spend your money on. For example, if you pay for gym membership, do you use it regularly or can you use some of the pay as you go ones that are now very popular? Can you cut down on anything that doesn’t help you lead a healthy lifestyle; e.g. alcohol, sweet things, coffees, etc.? It is surprising how much these can add up to, but saving the money in an interest-paying account can quickly grow too.
- Think about five things that are really important to you, prioritise them and assign a value to them on a scale of 1 – 5, with 1 being the lowest. This could be achieving promotion, buying a house, helping others less fortunate than you, being more environmentally conscious; anything really, so long as it is meaningful to you.
Young millennials will be the first to experience the UK pension system as intended by the reforms of the last decade – the full basic state pension and saving over a full working life through Automatic Enrolment – but for those in a Defined Contribution scheme it won’t be enough to get them to a TRR (target replacement rate). For them to achieve a TRR they will need higher pension contributions and to work slightly longer.
The best way to prepare is to start thinking about the above steps now.