A millennial’s guide to retirement
An unexpected consequence of starting this role six months ago is that people now openly talk to me...
According to the Office of National Statistics (ONS) one in three children born today will live to be 100. Those readers with a ‘glass half full’ attitude, or those who are familiar with the eighth wonder of the world, compounding, might say that this gives our children longer to save a decent retirement pot. They would be right. Just think, if you invest £2,500 a year for just two years when your child is born, it could turn into a pot of money worth more than £550,000 by the time they are 70 years old (assuming returns of 7% per annum). If you don’t, and they start saving when they are 30, they will have to invest £2,180 per year for 40 years (a total investment of almost £90,000) to get a pot of a similar size. That’s quite a jump, but still a manageable amount for most.
However, saving for our retirement is one thing. Making sure our pot of money lasts as long as we do is another. A generation ago it wasn’t a problem. Retirees could rely on the government to look after them, as well as potentially being the beneficiary of a generous defined benefit scheme, accrued after having a ‘job for life’.
The same can’t be said today. While pensions and savings products are now more flexible, the notion of retirement is changing, as people are spending many more years in that period of their life compared with past generations, and, importantly, the onus is on the individual to take care of themselves.
With this change of responsibility, and the evolution of the pensions landscape, comes a challenge, in my view, which has not yet been addressed to my satisfaction. Our idea of how our retirement money should be invested needs to evolve more.
Traditionally, portfolios were ‘de-risked’ as someone approached their retirement date. Equity holdings were transferred to bonds and cash. When cash rates were at 5%+ and inflation was lower, this was fine. You could take money out and the remainder would still grow a little, replenishing itself for future withdrawals. This, along with the traditional annuity (then at decent rates) was fine for a retirement of 5-10 years.
Today, we can expect to spend much longer in retirement. 30 years is not an unreasonable assumption. Bonds are at the end of a 30-year bull run and cash is paying a pittance. I believe people need to be a little shrewder in determining how to adjust their asset mix over their lifetime. Slotting investors into fixed allocations based on their age simply does not wash any more. We need to think about our ‘death’ date, rather than retirement date, and invest accordingly, taking more risk for longer.
Some investment companies are more ahead of the curve than others in this respect. For example, David Coombs, head of multi-asset investments at Rathbones, has overseen the implementation of a new lifestyling process for pensions which, depending on whether a person is looking to buy an annuity or move into a drawdown phase could see them invested 100% in equities right up to the age of 70.
This may seem extreme, and for some a step too far, but I totally agree with this asset allocation. Hopefully, by the time our children reach retirement age, it will be the new norm, and the risk of them outliving their income stream will be a lot less for them that it is for us today.