We’ve been sold a dream that in our golden years we’ll be roaming around Tenerife drinking pina coladas, playing bingo and generally enjoying the spoils of decades of work.
But, you’ll probably never be able to retire. And that might sound sensationalist or a clickbait title. I promise it’s not.
As a general rule, I try to stay on the nice side of personal finance. All my content is written and presented to help motivate you on your journey. But the reality for many of us is that the path in life you’re on right this second, won’t afford your retirement and if it does, it’ll come with the biggest pay cut in your career.
For most people, a normal life looks something like this:
You go to school, possibly university, get a job, hop up the career ladder and put away some money for the future, so that one day, decades from now you can sit back and enjoy a relaxing retirement. For most of us, this is normal. It’s what society says is normal because well, that’s the path most of us are on.
But what if I were to tell you that, now and in the future, this plan won’t cut it and that many of you won’t be able to retire at all? And if you do, it’ll be less comfortable than you think.
The thing is, none of you wants to hear this. And I’ve spoken to thousands of people over the last year who are unaware of this or worse, they choose to ignore this warning.
Because you’ve been told that saving in your workplace pension is enough or that you are doing well because you aren’t in tens of thousands of credit card debt. And I’ll admit, if that’s the case you’re doing better than some. But being completely frank, that’s the bare minimum of wealth building and you deserve to know the truth.
And I don’t say this lightly, because while many factors you can control, there are others you cannot influence that will keep you working into your 70s, 80s or 90s. I’m talking about housing, the stock market, a generational wealth divide that’s only getting wider, as well as Government policy that is focused on keeping you working for longer.
So…If you don’t want to continue working into your 90s, let’s look at the factors affecting every one of us and how you can combat this head-on.
We’ll look at those factors we can control first.
How much you save
According to the Financial Conduct Authority over a third (34%) of adults had either no savings (or less than £1,000) in a savings account. And this figure increases for those who are aged 18-24 where 47% have no or very little savings. That’s nearly 23 million people in the UK who right this second would quickly be in financial difficulty if they lost their primary source of income.
The chances are many of you aren’t saving enough, but I’ll agree that enough, is subjective. We are all at different stages of life and we each have a unique set of circumstances affecting our savings rate. And that’s ok! But for this video, we’re talking about retirement. Because one day in the future you’d like to down tools and enjoy your remaining years. Hopefully comfortably.
The reality is that many of us here in the UK are starting from zero or close to it when it comes to savings. The older you are, the harder it will be to catch up. But let me explain.
Generally speaking, you’ll hear people recommend that 10-15% of your income should be saved and invested for a comfortable retirement. And for most people, this is a decent starting point.
The good news is that a lot of the heavy lifting will be done by your workplace pension. Right now a minimum of 8% combined between your contributions and those from your employer must be made. Yet I know from personal experience, that many employees don’t contribute more than this and many employers are unable or unwilling to contribute more than the minimum requirements. While 8% is a start, it isn’t enough.
Let’s assume you are starting to save for retirement today and your investments earn 5% after inflation during your saving years. In our retirement, we plan to draw down our money using the “4% safe withdrawal rate”. Now these are the assumptions that many of us hear day in and day out, touted by personal finance experts worldwide and for this explanation, let’s say I agree with them.
If we save and invest 10% each year, it would take us 51 working years to replace our current income with our investments. If you’re 20 years old you’ll be 71 before you can replace your income. If you’re starting at age 40, saving 10%, you’ll be working until your 90s. Grim.
Of course, the simple answer is to just save more money. And this will of course help reduce the amount of time it takes you to be able to replace your income. But by saving 20% each month, you’d still have to wait 37 years. If you’re currently 30 years of age, you’d be in your late 60s.
And I know from speaking to a lot of people, that many of us have aspirations to retire in their late 50s or early 60s. If you’re in your 40s like me, you’ll need to be saving 50% of your income to achieve this.
Debt
According to the Money Charity people in the UK owed £1,846.5 billion at the end of October 2023. This is up by £22.5 billion from October 2022, an extra £423 per UK adult over the year. The average total debt per household, including mortgages, was £65,756.
An increase in household debt is ultimately going to result in the requirement for more income, less spending or most commonly, that any savings get sacrificed.
To give ourselves any chance at retiring one day we need to avoid debt at all costs, yet if you look around you, you’ll see bigger homes, luxury holidays and fancy cars. And you’ll ask yourself how can they afford it? The truth is that many people can’t.
Where our investments work for us, debt works against us, keeping us poor and eating away any chance at wealth building.
I can’t stress it enough, stay out of debt at all costs. And if you’re in debt, paying this down as quickly as possible is key.
Your investment returns
Now, your savings rate and the levels of debt you have is only part of the story. The returns you get from your investments are another. And the shocking news is that many workplace pensions aren’t returning 5% after inflation. In fact, after fees and expenses, I had one friend who earned less than 1% growth in his workplace pension BEFORE inflation over the past 15 years. In real terms, the money he invested had decreased significantly.
By default workplace pensions are prudent and your savings are invested across a broad mix of stocks and bonds. Depending on how you answered the questions posed when it was set up, your investments could be heavily weighted in bonds which often return a lower rate than stocks.
Now investments can go up and they can go down on any given day, but the younger you are, the longer you have to ride the waves up and down and generally speaking we would hope that stocks would increase at a faster rate over the long term.
By being heavily weighted in bonds from a young age, you are decreasing the overall potential of your investments when they should be working hardest for you.
Did you know you can change the stocks and bond allocation in your pension? And while you shouldn’t do this flippantly, I urge you, if you do nothing else after watching this video, to open up your pension platform and truly understand how your money is being invested.
Ask yourself these questions
- Are you happy with the mix of investments?
- Do you understand these?
- What is the return on your investments?
- If you continued on this path, would you be able to live off 4% of the total investment amount in retirement?
No one cares about your money like you do and you can no longer afford to leave your retirement to chance. Understanding your pension is core to this.
Some of you will choose to increase your pension contributions and others may be unhappy with the results they’ve seen. If this is the case, you could begin to research investments outside of your pensions and you could look into Stocks & Shares ISAs among other things.
The 4% withdrawal rate
Now the final part of our retirement planning process is our withdrawal rate in retirement. This is the amount of money we can withdraw each year without our money running out before we die.
The 4% rule is touted worldwide as gospel and being frank, it’s risky as hell. The 4% rule was founded on the Trinity study that took place in 1998 in the United States. It shows that with a withdrawal rate of 4%, one could sustain a lifestyle for 30 years. And that sounds great. Everything you need is tied up into a nice little bow.
Except for a few things.
- The study focused solely on the US stock market, not the UK. The returns are vastly different.
- It focused on the years 1926 through 1995, which is no indication of future performance
- It was based on a portfolio of 100% stocks
Similar studies for the UK market by MorningStar suggest that a safe withdrawal rate between 2.5% and 3% is a more prudent choice. And this massively changes how much we might need for our retirement.
At 4% you’d need 25x your annual spending invested
At 3% you’d need 33x your annual spending invested
At 2.5% you’d need 40x your annual spending invested
If you spend £20,000 a year, you’d need
£500,000 at 4%
£660,000 at 3%
£800,000 at 2.5%
And these values vary massively across each of the withdrawal rates and the truth is that no one knows what the future holds. So you have to make the decisions that you’re comfortable with.
In case you’re wondering, I work to about a 2.75% withdrawal rate myself.
To this point, I’ve explained the factors we are in control of: We choose the level of savings and investments we can make. We decide how our money is put to work for us and we can gauge our withdrawal rate in the future to protect ourselves….well from ourselves more than anything.
Yet why is it that many of us aren’t saving and investing enough? And the answer is that lots of people you know are living in the moment without consideration for the future. For some, that’s a considered choice. For others, it is a lack of knowledge, which I hope that this video hopes to change.
However even if we change attitudes and focus on those things that we can control and influence, I’m about to explain why that too may not be enough.
You’re probably wondering when the happy stories are coming. Sadly, today there are none.
Housing
Almost every day there’s a news article about housing affordability. This is nothing new but as one of the largest individual purchases any of us will make, getting on the housing ladder is a major challenge. And it’s only getting harder.
Consider your parents or your grandparents for just a moment. At what age did they buy their first home? And if they’re still around, ask them how much they paid.
With the average price of a home in 1980 being under £20,000 you can be forgiven for believing homes were more affordable because they were.
If we look at the Income to House Price Ratio, according to research by the House Buyer Bureau, the cost of a typical UK home in 1980 was 4.2 times the average earnings and last year in
2023, the cost of a typical UK home has over doubled to 8.8 times average earnings.
You’re not imagining it. It is harder today to buy a home. And for those of us who can get on the property ladder, we’re buying smaller homes, not because we want a smaller property, but because that’s all we can afford.
And this further adds to the problem. Older generations are now sitting on larger properties worth a greater sum. The capital growth in these properties often grows faster putting smaller homeowners further behind.
Not only that in 1977, the median age of first-time buyers was 27, whereas in 2023 this had risen to 32. We’re leaving it longer to buy a home, either spending those 5 years renting or living with our parents. Saving is probably optional.
And if we consider this further, this becomes an even bigger issue. Your home is likely the single largest asset your household owns. If you’re buying it later, paying more for it and it’s appreciating less than the homes of those older generations around us, then the divide in wealth will continue to grow.
And that’s the good news for those of you who can get in on the property market. Owning your property and paying off your mortgage will one day leave you with an asset. Hopefully a sizeable one. And once your mortgage is paid off, the house is yours and you’ll always have a roof over your head with very little ongoing costs.
For those of you who want to eventually retire, a paid-off home, alongside even the most modest of pensions will go a long way.
In the future, you may want to release the equity in your home for some cash through downsizing and this will be reserved only for those who own their home outright.
Now some of you will be planning to afford your retirement without the ownership of a home. And I get that. Our penchant for homeownership here in the UK & Ireland isn’t shared worldwide, not even in Europe where 30 % lived in rented housing as compared to 19% of all households here. Maybe you plan to fund your retirement through investments in your workplace pensions, your ISAs and ultimately the stock market. Well, let me poo all over that too.
Investing
I’ve already talked about investing in your workplace pension and why you might not get the returns you expect from this. Fees and your level of risk are factors that you can control. But what about those that are beyond us?
In every other video, you’ll hear me declare that the way to build wealth is to invest as much as you can. Because historically investing has returned decent results on the money we put to work. But in reality, we can only get an idea of what would have worked in the past.
We expect that as we invest, our capital compounds and grows. This compound growth builds our wealth slowly but surely over time.
But all of this is an assumption. It assumes that our investments will continue to grow over time. Some years they’ll grow lots, others little and some years there’ll be in decline in the price. It is rarely linear and there will always be ups and downs.
Yet the only factor that we know to be true is that past results are not an indication of future returns, something many of us forget easily.
As John Bogle says in his book Enough:
My concern is that too many of us make the implicit assumption that stock market history repeats itself when we know, deep down, that the only valid prism through which to view the market’s future is the one that takes into account not history, but the sources of stock returns.
Future stock returns depend on millions of factors outside our control and there is a significant chance that our investments provide less of a return than we hope, expect or need.
Inflation
And there’s another problem we need to address. Inflation. We’ve just come through a period of significant inflation in the Western world where assets of many industries increased significantly. In the UK, inflation reached a peak of 11% in 2022.
Inflation doesn’t affect us all equally
Yet for many inflation pressures affected our pockets significantly more than an 11% increase in our expenses. Because inflation affects us all differently. If you’re a coffee drinker, the actual rate of inflation was over 16.5%. The British Retail Consortium (BRC) said soaring coffee costs were behind food price inflation of 15.4 per cent in May 2023.
Food is more expensive and many of us reduced our bills by buying less or switching to cheaper alternatives. In doing so, we could relatively keep our expenses down, but for those on the lowest incomes who were already buying these brands, there is often little opportunity to switch and it becomes a case of doing without.
This is just one example and there are many inflationary pressures that our out of our control yet are affecting our finances.
If you have a mortgage, for example, your interest rate has likely jumped significantly. The Bank of England us interest rates to slow down spending. They actively try to make you poorer, to stop you from spending money. I know….
The renters among us don’t get relief either as with increased mortgage rates, landlords have been putting up rents at record speed to match or exceed their increased interest rates. And when the rates come down, don’t expect rents to follow.
Inflation eats away at our affordability and unless your wages are increasing at the rate of inflation or better, you are worse off today than you were this time last year.
Inflation benefits those who already own stocks
Yet, for those people who already hold investments, stocks getting more expensive is a good thing. Stocks generally benefit from inflation and their value often increases, but for those starting, buying stocks became significantly more expensive, possibly out of the reach of many and the return from these could be less.
Government Policy
The state pension is funded by those workers who pay National Insurance Contributions. Yet it’s no secret that there are increasing financial challenges due to the nation living longer in their retirement years.
To combat this directly, the government has increased the state pension age since 2010. Currently, both men and women can claim their state pension from the age of 66, but for those born after 5 April 1960, it’ll rise to 67 by 2028. It’ll eventually rise to 68, affecting those born after April 1977. I guarantee you that for those in their 20s now, we’ll see this rise to age 70 or beyond.
This is a problem because a higher state pension age exposes more individuals to the much less generous working-age benefit system for longer. If you want to retire before this, you’re going to have to fund it yourself.
Final thought
Look I appreciate this is likely a tough watch for many, but just because it’s uncomfortable doesn’t make it false.
You will need to work harder than those before you, you will likely need to save and invest more of your money and you’ll need to do so for longer. And yet I’d argue that it’s never been easier to make money and build wealth. Of course, I’ll be covering all of this here on my channel, so make sure you hit that like button and subscribe to keep up to date with all of my videos.
