Are millennials spending too much money?
PUBLISHED: 13:14 02 July 2019 | UPDATED: 13:14 02 July 2019
Peter Sharkey looks at the enormous chasm between millennials' monthly expenditure and the current state pension.
I'm indebted to research undertaken by Preston-based Profile Pensions which exposes, in the starkest possible detail, the enormous chasm between Millennials' monthly expenditure and the current state pension.
This might sound like an unfair comparison, but it isn't because the research is designed to impress upon Millennials, that oft-berated section of society, the importance of doing something about their pensions now. Not next week, next month, or after Christmas, but today.
As the graphic shows, the average Millennial spends £1,770 a month on living expenses. If they were to continue with a similar spending pattern into retirement, some items currently deemed 'essentials' would simply have to go. Why? Because the state pension (£731) would cover less than half (41%) of their current monthly outgoings.
The research claims that if you want to enjoy a comfortable retirement, you require an income of almost £28,500 a year, although it acknowledges that thoughts of pensions and retirement are nowhere near the top of the average Millennial's priorities.
This is entirely understandable because it's, well, a little weird for a 30-something adult to consider how their spending and other habits will change three or four decades from now. Indeed, as the research points out, "Taking account [of] everyday expenses [and] saving for your retirement while you're still young can seem like less of a necessity, and more of an inconvenience - especially when you could be spending your hard-earned money on a night out or a well-deserved holiday."
This begs an obvious question: are Millennials actually aware of the consequences they could face in the future without a sustainable pension pot?
Addressing this specific point, the research analyses Millennials' collective spending habits in an attempt to illustrate their potentially parlous financial state should they adopt a 'let's do it tomorrow' attitude and ignore the importance of retirement planning, despite the very notion of retiring being anathema to the average 30-something.
Admittedly, there are some forms of expenditure it's nigh on impossible to avoid incurring.
Rent, for instance, is a significant expense. On average, Millennials hand their landlords £773 a month in rent, an outgoing which, on its own, is more than the state pension. This single stark fact, suggests the research, highlights "how vital additional [pension] contributions are."
There's another way of addressing this, although let me preface the following suggestion with an acknowledgement that it's a far from easy solution.
Nonetheless, buying a property is invariably preferable to renting. Granted, it's no longer as straight forward as it was when I was 30, though the purpose of this temporary diversion is not to gloat but to show the arithmetic. Buying a home for say £175,000 with a 25-year mortgage at 2.25% interest would cost £769 a month. Even assuming modest annual growth in the property's value of 2% would mean it was worth more than £287,000 in 25 years, at which point the mortgage would be cleared.
Is it possible to create a pension and buy a property?
Well, it's far from easy, but as Profile Pensions are at pains to emphasise, focusing on and subsequently ditching unnecessary expenditure is a start.
"Most Millennials would be quick to [focus upon] gym memberships when considering cutting costs," the firm says, but their research reveals that the cohort "spend more on coffee (£52 per month) than they do on gym memberships (£40)."
As the graphic above shows, Millennials spend a monthly average of £211 on nights out. It would be unreasonable to suggest they abandon enjoying themselves, but "attempting to lower this amount, even just by half, would mean there was an extra £100 into a private pension."
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Of course, it's easy to examine Millennials' outgoings and tut-tut in prudish disapproval, but add the bottom half dozen items to takeaways and nights out and the total equates to just 29% of expenditure.
This made me consider whether I spent similar amounts during my salad days, when there was no internet, Netflix or mobile phones and the only coffee available was the instant variety; gym membership wasn't required as I played lots of outdoor sport. Prior to getting married, takeaways featured high on my list of outgoings, as did spending huge sums on beer during nights out. In truth, I probably pushed the 29% mark on 'tut-tut' expenditure too.
The realisation that this wasn't about to generate money for a house or a pension eventually hit home and it became possible to gradually change my expenditure pattern. In short, while today's Millennials can listen to plenty of solid advice regarding their future, they have to want to do something about it. In that respect, nothing has changed over the past three decades.
TAM Asset Management Ltd offer Millennials (and others!) the opportunity to save into a variety of Investment ISA portfolios from as little as £25 a month. For further details, please visit the MoneyMapp website.
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For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.