News Article : Millennials: 5 principles to retiring right
|Category:|| Retirement Provision : Retirement Funding|
|Posted:||21 Oct 2015|
The media seldom seems to be the bearer of good news when it comes to retirement
Headlines tell us that most baby boomers are set to go bust, with Gen X (born in the 1960’s and 1970’s) in hot pursuit. The message for millennials (born in the 1980’s and 1990’s) is characterised by much the same doom and gloom.
They are told that their generation cannot expect the same kind of investment returns that their parents enjoyed; that they are likely to retire a lot later, if they can afford to retire at all; and that their generation is one of instant gratification, so they won’t get around to saving and investing anyway.
These narratives are supported by a UBS Investor Watch report released earlier this year which states that millennials are the least likely to plan for the long term.
The report also noted that millennials are the least likely to remain composed during times of volatility and they avoid herding.
This is likely related to low financial literacy levels. While the number and complexity of savings and investment products has increased, financial literacy has not kept pace.
The study of behavioural finance teaches us that feelings of being overwhelmed by complex decisions often lead to inertia.
For this reason, even those millennials who appreciate the importance of taking control of their financial future, fail to act timeously.
Industry experts are cautioning that the current ways in which we perceive and save for retirement will be very different for millennials than for previous generations.
General consensus is that most millennials will need to work well into their seventies before they are able to retire, if they are able to retire at all.
However, the good news for millennials is that time is on their side. Consider the following five points which will set you on the right path to a comfortable retirement.
1. Budgeting is best practice
The saying “A penny saved is a penny earned” finds particular significance when those pennies are invested and you factor in compound investment returns and a long-term time horizon.
It is therefore really important to get a handle on your cash flow.
If you have any debt, pay off the debt with the highest interest rate first and aim to be debt free as soon as possible. Thereafter, ensure that you pay all your expenses so as to avoid the risk of further debt.
Be mindful of your lifestyle choices: you may well regret treating yourself today when you are battling to make ends meet tomorrow.
There are a number of mobile applications and programmes available to help you to create and stick to a budget and help you to manage your cash flow.
Once you understand your spending habits, you can make informed decisions as to where to cut back and how much you need to save and invest in real terms to meet your future needs.
2. Time is on your side
In future, global growth is unlikely to reach the high levels of the recent past. As a result, on aggregate, corporates earnings are likely to show slower growth and the same will be true for investors’ returns.
For this reason, it is of great importance that millennials start investing for their retirement from their very first pay check.
While many are familiar with Albert Einstein’s description of compound interest as the “eighth wonder of the world”, less well-known is the second part of his utterance: “He who understands it, earns it ... he who doesn't ... pays it.”
In this age of easy credit and widespread debt, the truth of Einstein’s words is clearly evident.
Making the choice between saving for the future and instant gratification can be challenging. A number of “save when you swipe” and automatic, small-scale debit order savings options have entered the market.
This shift towards automated savings facilities mitigate against our inclination for instant gratification.
3. Equity is your friend
During the global slowdown experienced in 2007/8 many millennials worldwide saw their parents’ and grandparents’ retirement savings take a knock.
Unsurprisingly, many are now distrustful of the stock market and perceive cash to be the safer bet.
The fact is that the interest earned on cash will not generate the above-inflation returns needed to grow their wealth in real terms.
Bulls and bears will come and go, but those investors with a long-term time horizon and a sufficiently diversified portfolio will be best positioned to realise their retirement goals.
4. Longevity is a risk
What we may have considered a terminal illness some years ago may now be a curable or at least manageable condition, and consequently both our life expectancy and quality of life have improved immensely.
Currently, the number of centenarians is increasing by 7% per year which implies that the centenarian population is effectively doubling every decade.
The US Census Bureau’s view is that life expectancy in the United States will be in the mid-80s by 2050, up from 77.85 in 2006, and predictions are that it will eventually top out in the low 90s.
In a South African context, life expectancy differs vastly between two groups: those living with HIV and those who are HIV negative.
While one section of the population may die young from Aids-related illnesses, the other enjoys a life expectancy that mirrors that of the first-world community.
Currently, life expectancy for the insured population in South Africa is in the mid-seventies for males and low 80s for females. This will likely increase as further advancements in medicine are made.
Thanks to growing longevity, millennials are likely to be in retirement for as long as they are part of the work force.
This means that each pay cheque they earn effectively needs to cover both their monthly expenses now and a month’s expenses in retirement.
The risk of outliving your capital is one that millennials will need to carefully manage.
5. Healthy habits start early
At this stage, many millennials have very little disposable income. They can be buying their first home, starting families, starting their first job or purchasing their first cars.
However, this should not stand in the way of commencing the long journey towards building a retirement nest egg.
You need not have a large sum to implement the kind of sound savings and investments habits which will stand you in good stead in the long term – you can start with any amount and simply add to it over time.
A financial advisor will assist you to attain financial independence at retirement.
Whether you have a significant capital lump sum to invest or you want to open an investment so as to make monthly contributions, a financial advisor will be able to assist you and provide valuable advice on other matters pertaining to risk and dread disease and large property and other asset purchases.
Are you on the right path to retirement?