Save money into my pension? I’d rather blow it on a holiday. This is the typical response of a millennial — marketing shorthand for a 20-something — when you ask them about financial planning.
For the generation that grew up in the Noughties, the quest to obtain the comfortable retirement that their parents might still dream of is a fairytale. Graduate debt, poorer pension provision and a runaway housing market are making their financial present a struggle, let alone their financial future.
If you are not a millennial — or a parent of one — then you may not be too concerned about the financial headwinds facing the young. But you should be.
Investors and the financial industry should pay close attention to how millennials are ripping up the financial rule book. By prioritising short-term spending over long-term saving, they may well be storing up problems for their own future. But in the meantime, their disruptive behaviour as consumers is reshaping the economy as we know it.
All the young dudes
Entitled and loaded with unrealistic expectations, millennials’ lack of brand loyalty and demanding behaviour makes them exceptionally difficult to attract as consumers. They want loads of pay, loads of power, and loads of stuff for free. Or at least — this is what we’re told by the people who want to sell things to them.
The millennials may be annoying, but they matter. They form the backbone of tomorrow’s economy. Those aged between 18 and 35 are already the largest segment of the US workforce, according to Pew Research Centre. If you can’t sell to millennials now, in 10 years it is likely your business will be in trouble. But never mind trying to sell to them — there are plenty of businesses who don’t even know who they are, or where to find them.
So who are the millennials? Many of them were at university when the global financial system crashed, which has cast a pall over their employment prospects. With home ownership at an all-time low among this generation, they are a boon for buy-to-let landlords, typically flitting about and staying in one place for not more than a year.
Instability is at the core of millennial psyche. Own stuff? They can’t afford to. The income of the average 22- to 30-year-old remains stubbornly 8 per cent lower than it was in 2008, says the UK’s Institute for Fiscal Studies. This income dip is hitting the young the hardest — the income of the median UK household returned to pre-recession level last year.
At the same time, millennials are seeing their take-home pay further eroded by student debt and higher living costs, making savings an expensive luxury.
Introduced just before the millennium, university tuition fees have now swelled to £9,000 a year. Combined with maintenance loans, debts of more than £40,000 upon graduation are all too common. The Student Loans Company takes a chunk of every month’s wages directly from your employer to service these debts, which in some cases will take decades to pay off.
And as house prices soar, requiring ever steeper deposits, millennials find themselves recast as Generation Rent. Even if the government hits all of its housebuilding targets, the demand for rental accommodation is set to swell to 1.1m over the next five years.
According to the Office for National Statistics, nearly a quarter of the average under 30-year-old’s monthly outgoings are on rent. This will be much higher in London, where rents have skyrocketed compared to the rest of the UK.
As much as marketing departments might see millennials as free spirits who don’t want to be tied down, renting is not a choice they want to make. A Goldman Sachs survey found in 2010 that 93 per cent of 18 to 34-year-olds renting their digs dreamt of owning their own place one day — a fact not lost on politicians with the Help to Buy scheme. But millennial renters are angry, too. London law firm Osborne Clarke conducted a poll of 1,000 young people aged 18 to 30 and found more than half felt their landlords were not doing enough to maintain the property they lived in. One in five tenants had actually moved out because of the “unacceptable actions” of their landlord.
At a time when many wealth managers are wringing their hands over middle-aged savers not having put enough into their pension pots, millennials are in a different category altogether.
The current pensions system was designed for a different era, where professionals stayed in one job for a long time and were generously provided for. By contrast, newer defined contribution schemes and auto-enrolment are less generous, and put the onus on the saver to make up the difference.
This leaves millennials looking at such a cavernous gap, it’s easy to see the appeal of giving up and going on holiday instead.
Today’s 25-year-olds need to save the equivalent of £800 a month over the next 40 years to retire at 65 with an income of £30,000 a year, according to Rebecca Taylor, director at the Chartered Institute for Securities and Investments.
“I don’t think people realise how much they need to save to get a decent income later on,” Ms Taylor says.
At best, millennials are likely to be paying 5 per cent of their salary into a pension pot with another 10 per cent contributed by their employer. To save £800 a month, they’d need a salary of more than £60,000.
For many, the thought of retirement seems so dim and distant the temptation is to opt out of the pension (losing the employer contributions in the process) and direct cash towards the more immediate problem of buying a house and reducing the monthly rent bill.
Making a short-term sacrifice may be rewarded by getting on the property ladder, but Ms Taylor warns that millennials should not assume they can catch up with missed pension payments in later life.
“For the generations that came before, a lot more was in their control,” says Neil Saunders, managing director of Conlumino, a consumer research agency. “They found money difficult, but they could save.” But all this insecurity and grafting has led millennials to think about their money very differently when compared to preceding generations.
Research published by Facebook this year analysed the conversations that working-age US-based millennials were having with each other on the social media platform. Unsurprisingly, it found millennials’ ideas of financial success differed wildly from their parents’ ideas.
Almost half of Facebook’s surveyed millennials said that the number one indicator of financial success was being debt free. One-fifth said that owning a home was the best indicator of financial success. Only around one in 10 said that being able to retire was an indicator of financial success.
Millennials are keen on saving, but are wary of anything branded an “investment”. According to Facebook, 86 per cent said they were actively saving — or trying to. But the responses to another survey suggest that this is often geared towards saving for a short-term goal (such as a holiday) rather than investing for the future.
More than half said they saved “simply because they want to be responsible” but millennials tend to be underinvested, and are 1.6 times more likely than older generations to have no investments at all, also according to Facebook analysis. Whereas half said they didn’t have enough money to invest, another quarter said they didn’t know how to. And more than half of the millennials Facebook surveyed said they felt they had no one to turn to for financial guidance — a clear opportunity for the increasingly digitised financial services sector.
The UK’s trade body for wealth managers is so concerned about this situation that it recently held a “millennial week” to discuss how to tap into this maddeningly disengaged market.
Nutmeg, the online wealth manager, has been targeting millennials since inception, positioning itself as the go-to online portal for the young. The company is one of burgeoning group of so-called “robo-advisers”, selling model portfolios built of ETFs that are dished out to investors based on their risk appetite.
This taps into another key millennial trend — they are “digital natives” who grew up on the internet and want to be able to do everything online, on demand.
“The millennials are growing up in a world where something like driving, which was seen as a complex problem, can now been done by computers,” says Scott Eblen, Nutmeg’s chief product officer and a former Google executive. “They have new perspectives and new attitudes to savings”. Online provision is crucial for this group, who in his words “Get what they need when they want it”.
David Cruickshank, global chairman of auditor Deloitte, describes millennials as a “networked generation” noting that millennials now have a wealth of information about their peers’ finances and salaries at their fingertips which they can use to their advantage.
Facebook also registers a high volume of millennials chatting about their money online. “Where it was once taboo to talk about money in public, millennials go online to talk about everything that matters to them,” Facebook says.
This is a generation that is happy to crowdsource its investment advice, asking peers about everything from credit card interest rates to tax-efficient investing options. As they grow up and prosper, this trend will continue and companies that don’t “tech up” could lose out.
“Wealth and money management is what the travel industry used to be 20 years ago. You couldn’t book yourself so someone had to do it for you,” Mr Eblen says. “Now people have the information themselves.”
But this is where the image of the disaffected, disenfranchised millennial comes to the fore. Millennials were either in university or working near the bottom rung of the career ladder when the financial crash hit. Starting out on lower salaries in a competitive environment with less job security, the economic blow has hit them harder.
“There’s definitely disillusionment with investing, and with the investment industry in general,” Mr Eblen says.
This lack of trust could be driving the millennials’ lack of brand loyalty, when it comes to financial services. According to Opinium research, they are the generation most prone to switching providers or reviewing their investments after seeing an advert, receiving an email, or having a conversation with peers.
The Facebook survey found that 45 per cent of them would switch banks if a better option came along. This is the kind of statistic that people cite when they announce that millennials have no “brand loyalty” — as though irrationally sticking with a service provider while better options pass by were a virtue. Truthfully, we should all be thinking like millennials.
Spend, spend, spend
Although their financial prognosis is poor, the millennials are a very powerful consumer group. The concept of saving seems so futile, they spend freely, insisting on a #yolo lifestyle (translation for oldies — you only live once) despite their restricted means.
“Millennials want to live life in an acceptable and fun way,” says Mr Saunders, adding that their “denial mechanism” often leads to them splurging instead of saving up for a deposit on a house.
As one reasonably-paid millennial put it: “It’s almost impossible to save for a house in London so I might as well just spend my money travelling the world.”
This is a common reaction — and it is holidays in particular that millennials will splurge on. A survey from Eventbrite in 2014 found that 78 per cent of millennials would prefer to spend their money on an “experience” — such as a holiday — over something tangible that they could own. Millennials are never going to put a picture of their new dining room furniture on Instagram. They probably don’t even have a dining room.
The tech-loving millennial is far less attached to “stuff” than previous generations. But equally, they expect to get more of what they do want for less, and increasingly, for free.
“They would find the idea of owning CDs silly,” says Mr Saunders. “The ownership model is gone and you’ve now got companies starting to ask how they can get around that.” Enter the so-called “sharing economy” — the idea that goods and services can be offered in a peer-to-peer way, rather than there being clearly defined providers and consumers.
This mindset, powered by smartphone technology, has spawned some of the most successful — and disruptive — consumer-facing businesses of the past decade.
Spotify, which allows members to pay a subscription and stream music through their phones, is squeezing the profits of the music industry (tellingly, most stars make their biggest profits nowadays from going to concerts). Netflix is doing the same for DVDs. Renting a room through Airbnb has opened up more holiday destinations for the footloose millennial, but hammered the hotel trade. And taxi app Uber, which allows users to cheaply share a ride, also plays directly to the millennials' lack of cash.
It could be argued that fast-growing financial sectors such as peer-to-peer lending or equity crowdfunding are cashing in on the same trend, as millennials invest directly in each other.
“They’re changing the way the whole economy is configured,” says Mr Saunders. “I don’t think it’s an exaggeration to say that.”
Case study: can Emma afford to buy?
Emma, 27, has an income of £2,500 a month before tax. She spends £640 a month on rent and bills, £170 on travel, and makes a student loan repayment of £100 a month. Her total student debt is around £15,000. She also pays £125 a month into a pension scheme run by her employer, who pays in £250. Other significant outgoings include eating out, holidays and a gym membership. She has no savings but would like to buy a house to reduce her rent bill.
Assuming Emma is a first-time buyer, it’s really a no-brainer at the moment — the answer is the Help to Buy Isa, says Darius McDermott, managing director of Chelsea Financial. Interest rates are actually very good — much better than most normal cash Isas in fact — and you get a 25 per cent boost from the government. There isn’t any other investment that guarantees that.
Much will depend on how soon Emma wants to buy and where, but let’s do some simple maths. If she can save the maximum £200 a month allowed with the Help to Buy Isa, using the best current rate of 4 per cent, which is with the Halifax, and taking the 25 per cent bonus into account, she could save the minimum 5 per cent deposit on the average UK house (£200,000) in just over three years.
If Emma wants to buy in London, the goalposts move quite dramatically as the average house price is more than double — and the Help to Buy Isa can only be used on a mortgage there of up to £450,000. To get the 5 per cent deposit for this, saving £200 a month, she’ll need to save for at least six and a half years.
These calculations do not take into account house price increases either, so in reality, it could take even longer, and there is no guarantee the Isa rates will stay so good for long.