Instead of prioritising saving for retirement, many millennials find themselves in the position of juggling between paying off student debt and saving towards a house deposit.
UK savers need to put away seven times their annual household income to maintain their current lifestyle in retirement, according to a new study.
The research, carried out by Fidelity International, calculated that 13% will need to be tucked away from the amount earned each year to meet this milestone, from the age of 25 to 68.
As Money Observer has previously pointed out, such figures look unrealistic for most millennials, unless their workplace schemes are very generous, with contributions from the employer of 10% or more.
In addition, most millennials will not have the luxury of being able to rely on generous final salary pensions.
Moreover, instead of prioritising saving for retirement, many millennials find themselves in the position of juggling between paying off student debt and saving towards a house deposit.
At the same time, the past decades of house price growth have meant many in the 20s and 30s age bracket spend a large chunk of those earnings on rent. The average millennial, according to the Landbay Rental Index, spends around a third of their monthly salary on rental accommodation.
Fidelity International suggests savers should aim to save a pension pot equal to 1x their annual household income by the time they are 30, 2x by the time they are 40, increasing to 7x by the time their state pension kicks in at 68.
It adds that compared to some international peers, UK savers are in a better-off position. Fidelity analysed how much of their household income citizens of the United States, Germany, Hong Kong, Japan and China would need to save. It found that on average citizens of those countries need to save an average of 10 times their household income.
Maike Currie, investment director at Fidelity International, comments: “While UK savers need to save less than other countries, there is still a lot more that could be done to educate and prepare the population to save for their retirement. Auto-enrolment has had a real impact, with 73% of employees now contributing to a UK pension, and employers have a significant role to play in engaging their workforce.”
Thanks to auto-enrolment, employers of all shapes and sizes have an obligation to offer a minimum of 3% from April 2019 onwards, while employees will be required to save at least 5%, giving a grand total of 8%. This 8% figure, though, falls well short of the 13% that Fidelity recommends needs to be saved.
Currie adds: “However, the onus is still on individuals to make sure they’re saving enough. This is why we have developed these simple rules of thumb to help people to achieve their long-term savings goals with a little bit of financial forward planning.”
It is also important not to rely on the state pension. A study by the Organisation for Economic Co-operation and Development (OECD), which compared global pension systems last December, found that the average UK pensioner receives 29% of their working income in retirement from mandatory pension schemes.
This figure is the lowest among the 35 OECD advanced economies that were analysed. The average so-called net replacement rate for the 35 countries is 63%. The most generous was Turkey, at 102%. The Netherlands and Portugal were ranked in second and third place.