Financial pressures to snowball for future generation

A generation of ‘New Centenarians’ will be forced to work well into their 70s to stay afloat, according to new research from Scottish Widows. In addition to working longer, they will face a hat-trick of financial pressures as early as their mid-twenties, with the stresses of saving for their first home, paying back their student loans and starting a retirement fund impacting on them much earlier than other generations.

The Office for National Statistics believes that one in three babies born in 2012 in the United Kingdom will live to be 100. This unsurpassed average life expectancy, combined with the rising costs of living, education and housing, means that our children and grandchildren will need to plan much earlier for their future and work for longer than ever before.

The Scottish Widows survey of 1,000 parents with children under the age of five reveals that nearly 78 per cent are concerned that their children may need to work well into their 70s.

Leading economist and trend forecaster Steve Lucas of Development Economics analysed the financial and life milestones that babies born in 2012 will reach before they turn 100. Looking backwards from 2112, the research paints a picture of what life might look like for these babies and examines the steps an average New Centenarian will have taken throughout life in comparison to his or her parents and grandparents.

The personal financial landscape 100 years in the future
Changes to ways that student loans (and, for many people, high tuition fees) are provided mean that those New Centenarians who complete higher education could be paying off their student debts of £73,000 until they are 52 years old.

Couples will increasingly delay having their first child until they are in their early 30s, compared to their late 20s now. An increasing proportion of people will either have no children or just one child. After the purchase of their home, considering the financial burden of having children is probably the most important financial decision they will face in their lives.

Financial products are likely to change to allow for mortgages to be paid over a longer period of time due to people working longer and increased life expectancy. New Centenarians are likely to be paying off their mortgage until they are at least 61, four years later than their parents and seven years later than their grandparents.

In order for New Centenarians to provide an acceptable standard of living for themselves in old age, a pension pot of £2.4m in retirement savings will need to start sooner.

The cost of social care is likely to be another major concern for this future generation. Many New Centenarians will need to contribute financially to the care costs of their parents’ generation, as well as try to put some funds aside for their own care costs in their final years.

Nature of work is likely to change
The state retirement age will be at least 70 by the turn of the next century and an increasing proportion of people will continue working well into their 70s, either because they can’t afford to retire or because they feel it is in their best interest to continue working.

However, the nature of their work is likely to change. According to Lucas, ‘In the future, older workers – especially in the professional and business services sector – are likely to stay working longer into their 70s, but the nature of this work will become more flexible and probably more part-time. Workers in manual or vocational careers are also likely to look to extend their working lives by undertaking a less strenuous, more part-time role.’

However, this means that New Centenarians could be supporting themselves with a potentially limited income for up to 30 years of retirement. In order to properly prepare for prolonged retirement and counter the effects of the collision of financial pressures, Lucas explains that New Centenarians will need to begin saving for their retirement from at least age 25 and that parents should encourage their children to start understanding finances and the importance of saving from a young age.

It isn’t all doom and gloom for this generation
Almost 45 per cent are concerned that their children will not be able to save enough money for a longer retirement. Yet almost 40 per cent of parents are not considering their child’s long-term future as part of their financial planning and half of all parents would not consider starting a pension for their child on their first birthday.

However, it isn’t all doom and gloom for this generation, as 41 per cent of parents are excited about the potential for long-lasting family relationships and a further 37 per cent are pleased to think their children will accomplish more in life because they will be healthier longer.

This research was undertaken based on past and expected future demographic trends using published research and data from the Office for National Statistics (ONS); this included trend data on life expectancy, healthy life expectancy, fertility, marriage, divorce, having children, commencement of working lives and ages of retirement. ONS data was also used to estimate expected future trends for financial matters including earnings, rents, house prices, mortgage costs and retirement incomes. A range of other information sources – published and unpublished – were utilised to obtain insights into recent and expected future social trends.

Estimates of future financial costs – including earnings, housing costs, student debt and retirement savings – were calculated using bespoke economic and financial models developed by the authors of the research. These figures were estimated by projected-forward underlying trends evident in existing datasets, coupled as appropriate with trend-based inflation assumptions.

The main exception is in the area of future student debt, where a new system is currently being introduced and for which current data cannot be used to construct forward estimates. In this case future estimates were based on a literature review of estimated future student debt liabilities, using sources including the Department for Education, the National Union of Students and student loan companies.