Those of us who are blessed with teenagers and young adults know only too well how hard it can be to get them to listen to advice on anything, least of all something which for them is half a century in the future.
I have been employed within the Financial Services industry for many years, so I would like to think that my family is reasonably financially aware. But as my own children move from education into the world of work, I have been shocked at how little they understand about all things financial.
It is true that teenagers view money as a way to short-term gratification. When they do start bringing home a wage packet, most will regard it as a means to acquiring the things that we all thought were important at that age: going out, clothes, a car and so on.
The more forward-thinking among them may be starting to ponder how they are going to be able to afford their first home, in a world where getting on the property ladder requires many years preparation.
What is concerning is how few younger people have had a single thought about their pension, or even understand what is involved in planning for their retirement. That’s not too surprising: a 20 year-old today is unlikely to be able to retire until their 70s. The bad news is that if they don’t start considering how they are going to fund that retirement sooner rather than later, they may not even be able to contemplate stopping work even then.
For a young person starting out in the world of work, a pension is most likely to seem like a deduction from their pay. Many simply don’t grasp that through the magic of auto-enrolment, they can effectively increase their salary by 3% by starting their pension the moment they start work – and that starting early will give them a massive advantage as they go through their working life.
The figures are striking: in order to accrue a pension pot of £250,000 by the current retirement age of 67 (which combined with the current state pension come close to providing a ‘moderate’ standard of living in retirement), you would need to save £237 every month if you started when you were 20. Leave it until you are 30 and that figure rises to £346; by the time you are 40 it has become £543 – more than double the age 20 figure.*
These figures include any contribution from an employer (which they have to make under auto-enrolment), and what’s more, the employee’s contribution is taken from gross (i.e. pre-tax) income – so the actual cost of saving this amount in terms of net income is likely to be much less than this headline figure.
There is another important point here: the vast majority of 20 year-olds who are in work are still living at home, which means they are probably in a good position to put away a small part of their salary every month.
And yet, many young people setting out in the world of work simply don’t know this stuff. It doesn’t appear to be taught in schools, and there is a huge inconsistency in the quality and quantity of information given by employers. So it falls to parents to educate and explain.
The best way to teach your young adults about money is to start communicating. Talk to them about your own financial responsibilities: explain what a mortgage is, how you manage your income against expenditure, household bills, tips on budgeting, planning, savings and even investing.
Include in this what provision you have made for your own retirement, and be honest if you didn’t really start saving early enough.
It may be a tough ask to get teenagers and young adults to listen – but they will thank you (eventually).
This projection assumes the following: Total product and fund charge of 0.70%; expected return rate of 5.17% which is in line with a balanced investor; inflation at 2%. The figures are not guaranteed the expected rate of return, rate of inflation and charges maybe higher or lower than the amount quoted.