The claim by Rebecca Taylor in the FT that “today’s 25-year-olds need to save the equivalent of £800 a month over the next 40 years to retire at 65 with an income of £30,000 a year” has met with much mirth. Perhaps Ms Taylor thinks millennials should sack one of their junior footmen to raise the cash.
Her claim embodies one of the things I hate about financial journalism – the tendency for advertising to masquerade as “expert” advice. A representative of the financial “services” industry wants us to hand over our money to that industry where a lot of it will disappear in management charges. There’s a surprise.
And guess what? Her claim is deeply questionable.
First, the maths. If you save £800 per month in real terms then, assuming a real return of three per cent per year, you’ll end up with over £720,000 after 40 years. An income of £30,000 per year represents only just over 4% of this. Ms Taylor seems to be assuming some combination of low returns, a long retirement or a desire to leave a bequest. All are possible, but dubious.
So, should young people try to save? There are three reasons to do so:
- The power of compounding. If you start saving £800 per month at 25, you’ll end up with over £720,000 at age 65. But if you only start when you’re 35, you’ll end up with less than £460,000. The first £96,000 you save will therefore make you over £260,000. This is because 3% per year compounds nicely over 30+ years.
- Your earnings might not increase with age, so you can’t bet on being able to save later. This isn’t just because robots might take your job. You might just want to jump off the treadmill. I’m earning less (in nominal terms) now than in my late 20s.
- Job satisfaction doesn’t increase with age. Sure, if you’re lucky you’ll be doing more interesting work. But this is offset by an increased awareness that life is short and hence that there are other things you’d rather do with your time. If you save when you’re young, you might be able to afford to retire early.
Against this, there are arguments against saving a lot:
- In extreme old age – when your health is gone - you can’t enjoy (pdf) your wealth so much. Holidays aren’t as much fun if your mobility is impaired, and fast cars are useless if your eyesight’s shot.
- You might not need as much as £30,000 per year. This is well above median full-time earnings. And when you stop work, your expenses fall – eg on commuting, work clothes and eating at lunchtime. And we should, with luck, get over £6000 a year from the state pension.
- There’s not much evidence that people saved too little in the past. The IFS estimates that most people approaching retirement have reasonable wealth: insofar as they don’t it’s because they were poor whilst they worked. And the ONS finds that older people are happier than others on average, suggesting that they at least didn’t save so little as to diminish their well-being. Granted, they benefited from rising house and share prices, which millennials might not enjoy. But this suggests that, if people weren’t irrationally spendthrift in the past, they might not be so today.
- Spending, like saving, can increase our future happiness. It can create happy memories, or a stock of consumption capital and leisure skills which allow us to better enjoy our retirement. As JP Koning says, consumption can be a long-lived asset.
- You might not live long. “He who dies rich dies disgraced” said Andrew Carnegie. He might have added that he also dies disappointed, as he missed on doing better things with money than saving.
On balance, the decision about how much to save is a tricky one, and probably impossible to get entirely right: we can save too much, as well as too little. This, I think, is one case for a decent state pension - it diminishes our need to make impossible decisions. Whatever the answer is, though, I doubt we’ll find it in the special pleading of vested interests.