Don’t blame the young
Ed Smith, our head of asset allocation research, debunks the myth that millennials have themselves to blame for the challenging financial futures they face, and provides a dose of reality for advisers and their clients of all generations to consider.
By Edward Smith
Australian real estate millionaire Tim Gurner came under fire last year when he advised millennials struggling to climb onto the housing ladder to stop buying fancy toast and overpriced coffee. He was berated around the world and rightly so. Let’s get one thing straight: millennials are not frittering away their future pensions on avocado and kombucha. And advisers are in good position to help close the big savings gap faced by younger generations, highlighted in our recent research report Too poor to retire. These are the clients of the future that need to be reached now with good financial advice.
A bad name
Contrary to the myth, those aged between 25-34 in the UK spend less relative to 55 - 64-year-olds than at any time since at least the 1960s. Adjusting for inflation, the consumption of the younger generation after housing costs is barely any higher today than it was in the late 1990s. So it was the baby boomers who ate more and more prawn cocktails and drank more and more cappuccinos, extending their consumption habits relative to the previous generation in stark contrast to young adults today.
Since the turn of the millennium, the consumption of 25 - 34-year-olds has actually fallen when compared with that of 55 - 64-year-olds. In 2001, the two age groups had the same after-housing expenditure, but by 2014, the younger generation was spending 15% less. Even the avocado rumours stem from nowhere: although young people spend more on eating out, the growth in this industry during the 21st century has been predominantly driven by better-off 55 - 64-year-olds (Intergenerational Commission 2018). Millennials get a bad name, but actually, it’s the older generation ordering the fancy toast.
We think this stereotyping may have been caused by a mix-up between consuming more conspicuously and consuming more. Ipsos Mori found that millennials have a taste for the finer things and place greater importance on owning expensive goods than previous generations. Perhaps they like to advertise their gains a little more, but in reality, such purchases are made infrequently.
Fortunately, in their capacity as consultants to the older generations, advisers can help bridge this generational gap by encouraging clients to bring their children and grandchildren into discussions about the family’s finances. Who knows, maybe this younger generation might become future clients themselves.
Rising costs, stagnating pay
All the talk of fancy lattes and avocado distracts from the actual problem: millennials face tough financial futures. Families of this generation are only half as likely to own their home by the age of 30 as baby boomers were by the same age. Even a repeat of the best economic conditions of recent decades would result in millennials only catching up with the homeownership rates of their (then 30-year old) predecessors by the age of 45.
The problem isn’t just buying a house. Millennials are paying more for the roof over their heads, whether buying or renting, spending an average of almost a quarter of their income on housing, while baby boomers paid a little over 15% at the same age.
These housing challenges are coupled with stagnating pay packets. 30-year-old millennials are earning less than generation X did at the same age, in inflation-adjusted terms. The stagnation in real pay since the financial crisis, the longest in 150 years, is making it harder for millennials to start saving. This generation is also less likely to be in possession of a secure, full-time contract.
Millennials aren’t the only ill-prepared generation. The finances of their predecessors, Generation X, aren’t in good shape either. According to the Center for Retirement Research, in the 1980s, almost a third of US households were at risk of retiring with inadequate income. Today, that number is more like 50%.
Financial advisers and the asset managers they work with are in a key position of responsibility in working towards a brighter future for younger generations, but this is also a great opportunity for those with a long-term outlook.
Let them eat avocado
So don’t dismiss the financial struggles of the young with a callous ‘let them eat avocado’. Through no fault of their own, their future is not going to be easy and their lifestyles may never match those of the baby boomers. The uphill financial battle faced by younger generations may be far more significant than the affordability of exotic fruit. In this struggle, relationships built over time and based on trust will be crucial. So now is the time to be reaching out to the next generation of savers.
And these realities will confront us all – that’s why we’ve written our latest InvestmentReport, Too poor to retire. We hope that it may be a useful tool to encourage good intergenerational dialogue among clients and their children and grandchildren about their financial futures. You can read the full report or a summary version on our website.
Photo by Samantha Grayson on Unsplash.