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Ed Smith, our head of asset allocation, looks at the savings shortfall younger generations are likely to face when they reach retirement, and what advisers and their clients can do about it.

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By Edward Smith 

They may not know it, but the younger generations are facing a very different retirement reality to the one most currently dream of. The problem is: most aren’t saving enough. The generally accepted benchmark for a decent income in retirement is 70% of pre-retirement income (the so-called 70% ‘replacement rate’). But no matter how you slice it, there is a large ‘savings gap’ in the UK and the rest of the developed world, with the current pension provisioning falling far short of what’s needed to reach this benchmark.

Advisers are in a good position to help younger clients, and the children and grandchildren of older clients, to close the savings gap, as we highlight in our recent research report Too poor to retire.

So, who does this gap affect? It isn’t just the millennials. The next generation to enter retirement, Generation X, has a mountain to climb too. This generation may be even worse off because they will have missed out on the defined benefit schemes enjoyed by the parents of millennials and started work before enrolment in defined contribution schemes became automatic. They are currently in their prime saving years, but aren’t doing enough of it. According to a YouGov study, 30% of people aged 45 to 54 save none of their disposable income.

We in the UK are not alone; in fact, most developed countries have comparable savings gaps. The average new worker in the UK, the US, Canada or Germany needs to save between 10% and 20% of their income to meet a 70% gap, and between 15% and 25% of their income to match the retirement incomes of previous generations.

There is a global funding shortfall, and it’s likely to keep growing.

Building your future

What can advisers do about it? You can discuss the possible solutions with your clients. And the good news is that there is a range of solutions. The bad news is that none of them are terribly appealing.

If they are typical of their generation, younger clients may need to consider some unappealing options – save more, spend less, or work for longer.

By saving more today, there will be more in the coffers for later. Sadly though, this doesn’t come without its own challenge: more in the coffers means less in the tills. More saving equals less consumption and less economic growth which won’t support government efforts to shrink the savings gap. 

Alternatively, if saving does not increase today, consumption decreases tomorrow as workers start to retire on inadequate incomes. As we have already discussed, reduced consumption has its own negative impacts.

Thankfully there is a third option: let’s work for longer and retire later. Hurrah! This will also lead to an increase in aggregate saving, but not necessarily fulfill the retirement dreams many of your clients will be hoping for.

So, there are options, but none are without their own challenges. However, the gap must be addressed. The World Economic Forum summed it up: “Given the current long-term, low-growth environment, it is unrealistic to expect that saving ~5% of a paycheck every year of your working life will provide a comparable income in retirement.”

Not enough younger people know the financial risks and challenges they face. Advisers can start building trust by explaining the savings gap to younger clients and how we can all help to close it. By establishing trust today, financial advisers can help younger generations work towards a brighter future.

These realities confront us all – that’s why we’ve written our latest InvestmentReport, Too poor to retire. You can read the full report or a summary version on our website, and we hope it will help you advise your clients and their children how best they can all mind the gap.

Photo by Jordan Whitfield on Unsplash.