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HOW TO BRIDGE THE 142% GAP BETWEEN MILLENNIAL SPENDING AND THE STATE PENSION

09/06/2019

Michelle Gribbin, Chief Financial Officer at Profile Pensions.

Touted as the first generation to be in a worse financial situation than their parents, millennials and the state of their finances remains constantly up for discussion with polarising opinions across the board.

While critics claim they have self-indulgent, instant gratification driven spending habits and the millennials retaliate by citing unaffordable housing and an ever-rising cost of living, the reason for the financial struggle this generation face is unimportant. What is important, however, is how they’re going to plan for their financial future.

Michelle Gribbin

Impartial pensions advisors, Profile Pensions, suggests the answer’s as simple as workplace pensions schemes. However, with the auto-enrollment amount rising from a 3 to 5% contribution from employees, many millennials have been tempted to pull out from the scheme altogether and rely on the State Pension.

To illustrate how little the government-provided monthly amount will allow for, the pensions advisor recently conducted a study that calculates the average Brit millennial spend and compares it with the £733 State Pension.

Break Down of Millennial Spend

Rent: Accounting for 118% of the monthly State Pension, millennials spend more on their rent than the entire monthly State Pension. Even if home ownership is expected in this stage of life, knowing that this amount of money will account for total expenses can really hit home.

Nights out & take away: Together these popular millennial expenses make up 49% of the State Pension. This combined expense of £322 may feel like it’s gone without you even noticing, but it would become much more significant if it’s half of all you’ve got.

Groceries, bills and transport: These are necessities you’re going regularly spend on for the rest of your life. Together, costing £484 and 74% of the State Pension, even if rent, nights out and take away are no longer apart of your budget, additional contributions are going to be needed if you want anything besides these basics in your lifestyle.

Coffee & gym memberships: When considering cutting costs, millennials often look to their gym memberships, which cost an average of £40 per month. However, the smaller, everyday costs can have the greater impact. Daily coffees outweigh that cost at £52, so it’s important to look at the spend from a monthly perspective.

Holidays: Millennials aren’t holidaying every month, but a little getaway every couple of months accounts for 4% of the State Pension. Few picture their retirement without even a staycation in the UK, so this £29 expense a month is something you’ll want to keep.

Internet and Netflix: A good way millennials save is by staying in, but evidently this isn’t free either. WiFi and Netflix, the cornerstone of a night in, cost £28 per month, 4% of the State Pension and unlikely to be going anywhere anytime soon.

Cost of Living Comfortably Over 68

As now established, the monthly state pension as of April 2019 is £731 is not enough to sustain your lifestyle. So, what is?

A Modest Pension Pot: The advisors suggest having an allowance of £1200 per month is a ‘modest pension pot’ for retirees to live off. It will provide an adequate lifestyle with the ability to afford the basics in life. Your annual holiday is likely to consist of a self catering break in the UK and you will buy fresh food from budget grocery stores and eat out a few times per year.

A Comfortable Pension Pot: At £2,371 per month, comfortable retirement will allow a few extras: frequently eating out in pubs and enjoying a good range of food, plus an annual package holiday with some UK/European short breaks. In your spare time you might have membership to a local sports club or be a season ticket holder.

Tips on Contributing From the Experts

Take advantage of your company’s workplace pension scheme: Due to auto enrolment, you’ll be saving a minimum of 8% of your salary per month towards retirement. Comprised of a 5% deduction from your pay and a 3% employer contribution, the 3% employer contribution is money you will not otherwise receive that is added to your pension pot for your future self. The 5% you contribute provides added tax relief.

Be proactive and make sure your scheme is best for you: As with many things, the default option may not be what’s best for you. Looking at your pension plan and assessing if it is measured in line with your attitude towards risk could increase contributions without an extra penny from your pocket.

Cook for yourself, rather than take away: It’s a 101 saving tip, but choosing to cook for yourself can be one of the easiest ways to cut costs. The average amount spent on groceries and takeaways together equals over £300 a month, by trading Deliveroo for Tesco, you could be putting aside as much as £110 a month towards your pension.

Enjoy nights out but be savvy about them: The average monthly amount spent on nights out is equal to 32% of the full state pension. While enjoying yourself while you’re young is important, spending less while you’re out, considering cheaper options or just staying in a little more can cut costs in half and save you £100 a month to go towards your private pension pot.

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Finance Derivative is a global financial and business analysis magazine, published by FM.Publishing. It is a yearly print and online magazine providing broad coverage and analysis of the financial industry, international business and the global economy.