The retirement role model gap

Today’s workers are facing the most significant demographic shift in generations, posing a serious challenge to the retirement savings system. Our retirement savings experience differs greatly from that of our grandparents and even our parents. It means that there’s a noticeable ‘role model gap’ for modern savers.

Tomorrow’s retirement will not resemble today’s or yesterday’s. The shift from Defined Benefit (DB) to Defined Contribution (DC) in the UK has left younger generations with fewer financial role models in their families and communities. Younger generations, and not just the young, can no longer rely on parents or grandparents to provide helpful role models for their own retirements. As the need for active pension decisions grows, many will be blindsided by retirement realities, often only understanding them when it is too late.

How retirement is going to look different to previous generations

Let’s use a personal example – my Grandpa Charlie, who worked as an engineer at a Tate & Lyle factory in Silvertown, East London for all of his working life before retiring at age 64. His retirement planning was vastly different to mine, in fact he needed to do very little. Almost everything now is different. 

Most savers today won’t have a guaranteed annual income in retirement

My Grandpa had a Defined Benefit pension which provided a guaranteed annual income with no need to make any calculations or decide how much he could take as income. However, most people of my generation (Gen X) and younger will predominantly have Defined Contribution pensions, which lack this certainty and frankly can’t even be called a pension!

Earlier this year, the Office for National Statistics (ONS) announced that it expects there to be more than 50,000 people who are 100 or more by 2050. Living to 100 is becoming more common. According to the ONS, the median pension pot for those nearing retirement is £107,300. Yet to maintain what the Pension and Lifetime Savings Association calls just a moderate lifestyle in retirement, a retiree would need a pension pot of at least £524,000, assuming they live for 33 years in retirement. Charlie didn’t need to think about this or make any calculations.

For today’s savers, it’s monumentally difficult to know whether their savings are ‘adequate’ for their planned retirement. Savers are faced with making decision after decision during their working life, in the lead-up to retirement and throughout retirement. Individually and collectively these decisions have a profound impact on their retirement income, not one of which Charlie had to consider. How many of these feel familiar?

‍

Most savers don’t have a set date for retirement any more

Age of retirement was set in my Grandpa’s generation – you retired at 65. The eagle-eyed among you will have spotted that Charlie actually retired when he was 64. This is because the factory was undergoing a significant change at that time and they offered him early retirement. However they did insist that he volunteered during the time he should have been working, so he worked at a charity building high chairs for older disabled children to increase their meal-time independence. 

The age of retirement now looks very different. We have a huge amount of choice and flexibility and can even choose to partially retire over an extended period. All these options weren’t available to previous generations but having access to this choice means we have to research and consider which option is best for us, weighing up whether we will have enough money. 

The recent cost of living crisis highlighted to some retirees that they didn’t have enough income to cover increased essential expenditure such as food and heating. I know of a few people who had to find jobs to cover these unexpected increases in cost. It’s not an easy decision to plan for, and even if your budgets and financial management skills are well honed, unless you have a lot of additional money accessible it’s possible to get caught out. 

How many of these feel familiar?

‍

Most people today are seeing a much higher cost of living than previous generations 

Renting a home was less common in my Grandpa’s generation. The scale of the rise of “generation rent” has been laid bare by the 2021 census that reveals the number of households renting has more than doubled in the last two decades in England and Wales, as home ownership rates have fallen*. Today, if we don’t own a home, we have to factor in paying rent once we retire, which will eat into our savings at a faster rate, meaning you need to save significantly more to achieve the same standard of living in retirement. The cost of living was much less when Grandpa Charlie was saving for retirement. Today, managing monthly bills often takes priority, leaving little left over to save for retirement. 

How many of these sound familiar?

‍

Without a retirement role model, what are the options?

My biggest concern is that my generation and others don’t yet realise that their retirements will not look like their parents’ or grandparents’. That’s why at Smart Pension we are urging savers to take control now to avoid unpleasant surprises as they approach retirement. 

We’re encouraging everyone to start building their pension savings early to increase the chances of enjoying the lifestyle they want in retirement. Savers can start here:

• How much should you save for retirement? 
• Facing the pension challenge: saving for a century
• Build your pension

If you're an employer or a HR professional, there's potentially more you can do

We know that pensions might not be top of your priority list. However, we encourage you to talk to your employees about your workplace pension and the importance of saving for retirement. Share this information with your employees today.

*Number of households renting has more than doubled since 2001, census reveals