How to avoid retirement disaster

The pre-retirement savings window has shrunk dramatically for many Brits. Younger folk need to start saving more aggressively.

The gap between becoming mortgage-free and retirement is shrinking. That’s a worrying development as it suggests that a fair number of younger people aren’t going to have a decent retirement.

According to research from Santander, people who took out their first mortgage in the early 60s had a ‘savings window’ of 21 years on average. In other words, once they had paid off their mortgage, they carried on working – and saving – for 21 years. However, people who took out their first mortgage between 2000 and 2010 will have, on average, just ten mortgage-free years to save.

Why has this happened?

I think the main explanation for this change is that property prices have risen so much since the early 60s. Between 1959 and 2009, house prices went up by 278% above inflation. That’s a real-terms rise of 2.7% a year.

What’s more, in the noughties, lenders were willing to advance loans that were five times the borrower’s salary. Inevitably, that meant it would take longer for borrowers to pay off their debt.

A secondary factor may be a change in cultural attitudes to debt. Back in the 60s, some Brits saw debt as a rather shameful thing and wanted to get rid of their debt as soon as possible – so I’m told anyway, I was still sucking my thumb when the decade ended. In more recent times debt hasn’t been seen as shameful, so, for many people, there has been no great hurry to pay off debt at any speed.

Why am I worried?

I’m worried by what has happened to the savings window because it suggests that many youngsters who are currently in their 20s and 30s aren’t going to have much money when they retire. These younger folk are only going to have ten years to save aggressively for their retirement, and that’s probably not going to be enough time.

What’s more, this cohort of people also won’t get much benefit from the miracle of compound interest. If you save a thousand pounds when you’re 25, it will have grown substantially by the time you reach retirement age, but if you don’t salt the money away until you’re 55, it’s going to be much smaller when you reach retirement.

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That’s a pretty worrying backdrop when you also remember that state provision for pensioners may be even less generous in 30 years time than it is now.

Property

Now some people say that you don’t need to save much for your retirement because your property can be your pension. Certainly some people who have retired in the last 20 years or so have been able to do this. They’ve either funded their retirement by selling their family home and downsizing to a cheaper property or they’ve generated some cash by signing up for an equity release product.

It’s great that so many pensioners have benefitted from rising property prices, but I still think it’s dangerous for younger generations to rely on property to fund their retirement. There are three reasons for this:

-          There are no guarantees that property prices will continue to rise by close to 3% a year

-          Relying on one property is risky. Even if property prices across the UK rise, your home may still perform poorly as an investment. The area in which you live might become unfashionable or it might be hit by the closure of a large local employer.

-          If your home is small, downsizing may not be a realistic option. You might still be able to generate some cash via equity release but it still might not be enough to fund a comfortable retirement. (You may be quite disappointed by the amount of money that equity release generates for you.)

What can you do?

So if you can’t rely on property, what should people in their 20s and 30s be doing?

Well, I’d really urge them to try and save some money for their retirement if they possibly can. Even if it’s only £50 a month. If you can put that money away early, it will have plenty of time to turn into a decent pension pot. And if your employer offers a contributory pension scheme where it matches the contributions that you make to your pension pot, you’d be mad not to take advantage!

I know that it can be hard to find money to save, but I’m sure that many folk still have some fat they can cut. Check out How to save when you’ve got no money for more tips on how to do this.

It’s also really important that you draw up a financial plan. Then you can look at your financial life as a whole and you’ll be more likely to make good financial decisions.

I admit this hasn’t been one of my more cheerful articles. But I am going to end on a positive note. If you make changes now, start saving more now, then you should be able to avoid a retirement disaster. You might even be able to enjoy your twilight years.

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