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.
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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.
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.
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.
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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.
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.
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
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.
You can see more from Connor on this topic and many others his YouTube here and his Foundered website.
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