Millennial to millionaire: how to help staff make the transformation before retirement

You may not want to admit it, but if you were born between the early 1980s to the mid-1990s, you are indeed classified as a millennial. The reason this group of people are called millennials is that they are the first graduating class of 2000 – the new millennium, who are entering the workforce.

As a millennial, if you decided to go to university you probably entered the world of work anywhere between 2001 to 2015. Consequently, you either entered work and hit your stride just as the financial crisis really kicked off, or you joined it when the after effects were still being felt and businesses were cutting back in their workforce.

Effectively, you have entered a world of work which is not as accessible or as comfortable as it once was for many baby boomer parents. Jobs are no longer for life. You no longer have access to a gold-plated final salary pension scheme, houses cost nearly 10 times your starting salary and there’s countless TV personalities, articles and blogs stating that you’re a lazy, entitled narcissist who couldn’t do a hard day’s work if your life depended on it.

One major area of concern is that millennials could be sleepwalking into a financial crisis when it comes to their retirement. Some may not trust traditional financial services, partly due to the reputational hang over of the finance industry post 2008, and as such don’t invest in pensions. Some simply cannot afford to pay as much as they would like, due to soaring rents, house prices and the general cost of living.

So how can we help this unloved generation?

Time is on their side

Let’s take a millennial who is 30 years old who has never invested into a pension before. If she wanted to have a pension pot worth roughly £1m plus at the point of retirement, which she considers is more than sufficient to support her lifestyle, how much would she need to contribute each month?

If we assume that she invests her contributions at 6% return, then if inflation remains at around 2.5% and management fees are not excessive, she would need to contribute around £600 per month until the current state retirement age of 68. This would lead to a pension pot of around £1.12m at the point of retirement.

So how can we work with a millennial to carve out £600 per month from their already stretched budgets?

Is there free money on the table?

Many employees who are auto-enrolled into a workplace pension don’t realise that there could be free money from their employer if they increase their own contributions by just a small amount. Highlighting this can take a significant chunk out of this £600 monthly target.

For example, someone earning £30,000 p.a at a typical auto enrolment level of 2% employee contribution and 2% employer contribution is only putting £100 per month into their pension. However, many employers will contribute 5% or more, and if matched by the employee to a total of 10%, we are almost half way to our target.

Budgeting is the key to future success

That leaves an additional £300 per month that a millennial would need to save and contribute in to their pension in order to hit that millionaire status at the point of retirement.

Our work with employers and employees shows that the biggest reason people do not save more for their retirement is that they feel they cannot afford it. There is no doubt that times are tough for millennials, but arguably there is potential for a better balance between spending now and saving for the future. Albeit a challenge, there are cut backs many of us can make every day and month that could add up to a lot more in the long run.

A recent article by estate agency Strutt & Parkers suggested that millennials could afford a £33,000 deposit within 5 years if they cut down on six ‘luxuries’. This article had a huge social media backlash as many of the assumptions were ridiculed as unrealistic.

Whilst this article rubs some up the wrong way, it does provide a framework for millennials to look at their finances and really question where they can cut some of the excess. How much they save will obviously depend on how extravagant they are in each area. The areas are: daily coffee purchases, gym memberships, minibreak holidays, takeaways, lottery tickets, mobile upgrades and a night out each week.

I understand the frustration of millennials, being one myself, when reading research like this but there’s no doubt that a few small changes in daily spends could make a real difference to their future whether you’d be willing to switch your daily coffee run for a homemade brew or bringing your own lunch to work. Small costs like this add up to a surprising amount each month, potentially the £300 we are missing in our example above.

Confidence

A study by the U.S bank Wells Fargo on millennials and money found that 20% of young people said they will "never" be invested in the markets while 53% said they will "never be comfortable investing in the markets."

It is for this reason that many employers are now engaging with digital financial advisers to help their workforce engage with their finances. This provides an affordable solution to give millennials the help they need and confidence to take positive action with their finances. These solutions are growing in popularity and some exceptional use cases are emerging from innovative employers.

Phil Blows is director at Wealth Wizards.

This article was provided by Wealth Wizards.