Our financial life develops in three stages. First is the ‘starting out phase’ where you start working, pay down student debt and consider big-ticket purchases like buying a home, or starting a family, a business or growing a career.
Stage two is the accumulation phase, where your earning potential is usually close to or at its peak. In this phase, you should ideally be debt-free and at the peak of your career. In anticipation of your approaching retirement, saving is paramount.
Stage three is the last and final stage, traditionally known as retirement. This stage can financially be either the most enjoyable or stressful stage. The financial success of retirement is dependent on how successfully you saved during the first two stages.
A new retirement landscape
While the first two stages of life have remained relatively unchanged, the last stage has changed dramatically in recent years. Not so long ago, retirement was the shortest phase in life, but changes in longevity have resulted in retirement quickly becoming the longest. This significantly increases the risk that you will outlive your savings.
Outliving your retirement savings
While longer, healthier lifespans mean increased time with loved ones and a better quality of life, they also mean it is essential that young people today save even more for their retirement than previous generations.
While research shows that millennials may be better at saving than previous generations, these savings are not long-term focused and this generation is lagging behind when it comes to investing for retirement.
In South Africa, as in many other countries, the unemployment rate among the youth continues to rise. While higher economic growth could be one solution, some regulators and policymakers believe older people should rather make way for the younger generation. In the USA, the age group with the highest employment growth rate is that above the age of 70. Reasons provided for this are that they know more, complain less and are cheaper than their younger counterparts.
This conflict between the younger generation and those who should be retired in the workplace is set to increase and employers will be required to adopt policies that accommodate both.
‘New retirement’ translates into revised products
Financial advisers, policy makers and society at large have two very important tasks at hand. The first task is equipping today’s millennials and Generation Z’s with the financial tools to take care of their retirement years. The goal should be to ensure sufficient time to save, ideally from a young age, to generate a regular, supporting income for an unknown period of time in retirement. Future retirees will need to understand the importance of lifestyle analysis including cutting discretionary expenses or downsizing, and then decide on how much longer they want and need to work.
Secondly, products will need to be developed for those in retirement that provide longevity cover while offering sufficient flexibility for all the changing needs of retirees. Building longevity planning into your portfolio is no longer negotiable. Together with this comes the realisation that retirement means a 30-year investment term. That requires a more aggressive investment approach than used in the past to combat the impact of inflation.
How can advisers better engage millennials?
Millennials are the current and future clients of South African financial services providers, but they are not always an easy group to engage with.
Millennials tend to be more risk averse and short-term minded than other demographic groups. Financial advisers need to be cognisant of this, and be prepared with the necessary tools and educational material to overcome potential hurdles.
For financial advisers, it’s also important to note that millennials generally trust their parents’ advice on financial matters above all sources. It is therefore important for generational advice to be a key part of any financial adviser’s service proposition.