With a third of young people facing a lifetime in rented accommodation, a time bomb is ticking ahead of their retirement. Are any of them saving enough to cover rent as well as living costs in retirement?
A new report has revealed that up to a third of millennials face living in private rented accommodation all their lives.
The Resolution Foundation’s research found that 40% of millennials – people born between 1980 and 1996 – were living in rented housing by the age of 30, twice as many as the previous generation.
“Britain’s housing problems have developed into a full-blown crisis and young people are bearing the brunt – paying a record share of their income on housing in return for living in smaller, rented accommodation,” says Lindsay Judge, senior policy analyst at the Resolution Foundation.
“Up to a third of millennials face the prospect of renting from cradle to grave.”
The think tank goes on to warn that while renting may be ok when you have few ties, it is “far less fit for purpose” for people with children due to the lack of security. A record 1.8 million families with children rent now up from 600,000 15 years ago.
But, another problem is looming over millennials if they fail to get onto the housing ladder: an expensive retirement.
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Paying rent in retirement
Most pension calculations are based on you needing around two thirds of your working income when you retire.
This assumes that you don’t need to cover the costs of going to work anymore, and you a living in a house that you own outright, having strived to pay off your mortgage during your working lifetime.
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It’s a picture that works if you are looking at the baby boomer generation, or even ‘generation X’, but it doesn’t work for millennials who could well still be paying rent after retirement.
A £900 a month rental bill would put a substantial dent in most pension pots, factor in that many reports warn we aren’t saving enough for retirement and you could be looking at a generation that is facing a broke retirement.
Renters need an extra £65,000
Based on the average monthly rent of £900, according to the HomeLet Rental Index, you would need an extra £10,800 in your retirement income to cover your rent at todays' prices.
You would need an extra £65,000 in your pension pot to cover that rental cost on top of the £300,000 you need to maintain the average pension income of £18,000, according to figures from Aegon.
Given the uphill struggle millennials say they face to save up for a deposit on a house, the chances they are setting aside enough into their pension each month to give them a retirement income that will cover rent is unlikely.
In 30 years' time, when the first millennials hit retirement age, we could see a pension crisis as people discover their retirement income isn’t sufficient to cover their housing costs.