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Millennials need to rethink retirement or face working until 80

Saving more from an early age is the only way to take control of your retirement.


by Michelle McGagh on Oct 10, 2014 at 08:00

Millennials need to rethink retirement or face working until 80

Government forecasts that 'millennials', those born at the end of the last century, will have to wait until age 80 to retire are unrealistic, but so is the idea of retiring at age 55.

For people in their 20s and 30s, retirement is edging further away. Forecasts by the Department for Work and Pensions (DWP) suggest the average retirement age needs to increase by six months every year to reflect longer life expectancy. This means over the next 30 years, people would stop work at age 80.

Working until 80 is undesirable and unrealistic, but it is inevitable that individuals will have to continue working past the long-held retirement age of 65. The government has already increased the state pension age to 68 and has plans to formally link it to longevity meaning it could push even higher.

Pensions minister Steve Webb said working past 65 will benefit individuals and the state, on the one hand giving people more time to build up sufficient pension funds, while keeping a lid on the bill for the state pension, which is expected to quadruple by the mid-2060s to £420 billion from £98 billion this year.

This combined with a falling birth rate means the idea of retirement and the age which retirement starts needs to change.

Pensions expert Ros Altmann said that while retirement ages of 80 may be too far, individuals should no longer expect to retire at 55 – currently the earliest age at which pension funds can be accessed.

While people may bemoan how long they have to wait for retirement, Altmann said individuals are on average retiring at an earlier age than they did in the 1950s.

‘In the 1950s, the average age of retirement for men was 67,’ she said. ‘At that time life expectancy was much lower than it is today, yet people are retiring earlier. This means that lifetime income is lower, especially as they often start work much later too, and they have less chance to save for a good later life income.’

She said that it is only since the 1980s that ‘an expectation had developed that people should aspire to retire in their 50s’.

‘This is simply not sensible or sustainable, especially as life expectancy has risen significantly, general health has improved and the physical demands of most types of work have eased,’ said Altmann.

No retirement age

For younger generations the idea of a ‘retirement age’ will be an outdated concept with individual choice, and importantly economic means, determining when a person stops working.

‘The traditional idea of stopping work as soon as you reach a ‘pension age’, whether that be state pension age, or the age at which a private or company pension starts, is now out of date,’ said Altmann.

‘There is no official retirement age any more even though many commentators refer to the state pension age as the retirement age. In fact, average retirement age for women is just over 63, which is beyond their state pension age although for men it is still a little under 65.’

The idea of a ‘phased retirement’ which incorporates part-time work, a move to a consultancy role, or temporary time out of the workplace, will be the future of retirement for millennials.

Research by insurer Aegon reveals half of people intend to opt for a phased retirement. ‘People already accept the need to work to a later age and…half of people intend to opt for a phased retirement whereby they gradually reduce the number of hours they work before fully retiring,’ said Aegon managing director David Macmillan.

Retire when you want

In order to retire when you want to, whether that is 55 or 80, you need to make sure you have enough money saved in order to fund your lifestyle.

Currently though very few people are actually saving enough to deliver the retirement they want.

‘Two factors mean that it is very likely that in the years to come, most people will work past age 65,’ said Macmillan. ‘Firstly, life expectancy has been increasing at 2.5 years per decade and on average people can expect to live into their 80s.

‘While it’s great news that we are all living longer, this means that people’s savings will need to last much longer. People can either choose to keep working for longer, or save more at an early age but either way our research indicates that savings rates urgently need to increase as only 7% of people in our survey are currently on track for the retirement income they’d like.’

Saving enough has been made easier for millennials through the process of auto-enrolment, where employees are automatically enrolled into their workplace pension scheme. However, between employee and employer contributions plus a government tax relief top-up, auto-enrolment will mean just 8% of salary is being saved.

While this may sound like a lot, it isn’t enough and pension experts have said workers should be saving around 15% of their salary.

Pensions minister Steve Webb has backed the idea of ‘auto-escalation’, which is operated in the US, and pushed up employees’ contributions automatically when they receive a pay rise.

‘Having got millions of people into workplace saving we need to get them saving more than the bare statutory minimum of 8%,’ he told the Liberal Democrat conference.

‘I am quite attracted to the idea that when you start a job the norm is that each time you get a pay rise a part of the extra cash goes into your pension, building up gradually to a worthwhile sum. You could opt out of this automatic escalation but unless you actively chose to opt out, you would gradually contribute more.’

6 comments so far. Why not have your say?

Keith Cobby

Oct 10, 2014 at 09:10

Who will want to save into a pension when you do not know the age at which you can withdraw the money. Young people starting work may not be able to draw from their pensions until they are in their 70's.

Far better to build your own portfolio through ISAs and then you can withdraw income or capital at any age.

When higher rate tax relief is withdrawn pensions will wither.

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Oct 10, 2014 at 11:31

Start saving/investing early in life and be consistent (save with every paycheck). The power of compounding is lost on many people. Also maxing out contributions when possible, eliminating debt, avoiding major risks with your nest egg and planning for multiple streams of income once retired (pensions, dividends, part time work, etc.) should all be part of everyone's plan.. I recently found the site Retirement And Good Living which provides information on all these issues as well as finances, health, retirement locations, part time work and also has a great blog of guest posts about a variety of retirement topics.

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Oct 10, 2014 at 14:55

I think there is now an argument for not doing anything and living life for today. I am not stating that is what you definitely should do but if the state pension age for today's youngsters may perhaps be age 75, perhaps it will be means tested and if you have money in a pension it is going to be 57 when you can access that but perhaps by the time they get their it could be 65 and, even if you do save there is no guarantee your money will grow in real terms as it needs to grow at perhaps 3% per year and there is no guarantee of that and, even if it does grow, will £200k in a pot be useful or will it stop you getting means tested benefits?

a chap i know has decided to work till he drops because even with good pension savings of many hundreds of pounds per month (perhaps £750 per month) then his pension is only predicted to be perhaps £14k per year in today's terms. (He is only 27 and so he is saving more than most his age). £14k per year is hardly worth retiring for.

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William Phillips

Oct 10, 2014 at 19:08

"even if it does grow, will £200k in a pot be useful or will it stop you getting means tested benefits?"

Why do you presume that for ever after the people who HAVE provided for their old age will be happy to cough up your benefits as well- means-tested or not?

I would not be surprised if most of the welfare state had not gone for good by 2050. It is hopelessly unaffordable and dysgenic in its side effects.

The media drumbeat for 'assisted dying' all of a sudden is most revealing!

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Aidan Ward

Oct 12, 2014 at 13:41

Unfortunately "compounding" is also becoming a myth. Several countries in Europe experienced below zero returns after costs over a ten year period. And investment practice is actively undermining value in investee companies and the economy as a whole. There is a lot to fix and it is highly misleading to look to savers to fix it.

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Rose G

Oct 15, 2014 at 12:53

my advice for what it is worth, why save when your money is being used by banks to loan to others, giving you nothing for your savings, while charging someone else for the loan of your money?

banking world has shown us that the most corrupt in our society wield most power & will always be bailed out using the income from ordinary workers to save a corrupt people so they can have their million pound golden hand shake; remember Fred the Shred anyone, no faith in banking industry, it is something I have little control over my own money because govts can come along and wipe it out with inflation & other silly ill thought out BoE strategy, what strategy?

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