Investing for the Future: Retirement Edition

In terms of finances, Generation Z is no stranger to investing. According to information from the Royal Mint, 80% of 16-25-year-olds are choosing to invest in their future, with over half (57%) investing up to £200 per month. Should this continue at the same rate, it’s estimated that the investments made could reach £9.4 billion over the next financial year.

Nevertheless, despite this conscious effort to invest, the ‘get rich quick’ mentality is very much alive. According to Barclays research, 49% of Gen Z only plan to invest their money for 2-5 years.

It’s great that young people are taking such an interest in personal finance, especially considering it’s not something which is taught in UK schools. But it’s apparent that long-term investments are not as much of a pressing issue as they should be.  

This research aims to illustrate how long-term investments can potentially better prepare the younger generation for the future.   

How Much Will Retirement Cost? 

The Retirement Living Standards Report - conducted by the Pensions and Lifetime Savings Association (PLSA) and Loughborough University – provides estimates regarding the amount of money you’ll need to afford retirement.  

Their research has been split into three lifestyle types and includes what style of life is possible within each of the budgets. It should provide people with a rough idea as to what they should be aiming at for their retirement.  

Minimum:

This lifestyle is the most basic one in terms of finances. This amount of money is estimated to cover all the necessities, including non-negotiables like food and bills, with some leftovers in the pot.  

These pensioners enjoy the simple life and know how to make a little go a long way. These are the bargain hunters, who visit the caravan at the seaside for one week and a long weekend in the summer. You can find them taking public transport to do the weekly shop at low-cost supermarkets.  

A single person living by these means would incur a lifetime cost of £204,800 at an annual cost of £12,800. To paint a clearer picture of affordability, the funds have been divided into separate budgets for six traditional aspects of life:  

• House: i.e. DIY maintenance and decorating one room a year, costing £1.021.80. 
• Food: £54 a week on food (including food away from the home).
• Transport: No car. Uses public transport costing £593.76 a year. 
• Holidays and leisure: A week and a long weekend in the UK every year, costing £502.56. 
• Clothing and personal: Up to £580 for clothing and footwear each year.
• Helping others: £20 for each birthday present.

Naturally, for a couple, the cost would be slightly higher, with a lifetime cost totalling £318,400 and an annual income of £19,900.   

• House: £1175.72
• Food: £96 per week
• Transport: £947.04 per year
• Holidays and leisure: £857.76
• Clothing and personal: £460 per person per year 
• Helping others: £20 for each birthday present

Moderate:  

This category has further financial security and flexibility than the more frugal spenders. The PLSA site states that those who fall into this category (which is about half of employees) will have more opportunities to do the things they want to do in retirement.  

These are the pensioners that favour a cruise or a two all-inclusive week trip to Madeira. They still drive a family car to get them from A to B, which they upgrade every 10 years or so.  

A single person living this lifestyle would need a lifetime amount of £372,000, at an annual cost of £23,300. 

• House: £1506.44 for the home fund
• Food: £74 a week for food
• Transport: £2,993.28 (3-year old car replaced every 10 years)
• Holidays and leisure: £1,492.80 (2 weeks in Europe and a long weekend in the UK)
• Clothing and personal: Up to £791 
• Helping others: £34

For a couple, this is slightly higher, with the lifetime cost totalling £544,000 and an annual income of £34,000.

• House: £1,733.16 per year
• Food: £127 per week 
• Transport: £3,148.32 per year
• Holidays and leisure: £2,196.48 per year 
• Clothing and personal: £791 per person 
• Helping others: £34 each

Comfortable:

Those who fall into this bracket are the wealthiest, who have the most financial freedom and can afford some luxuries. It’s a lifestyle that allows them to be more spontaneous with their money.  

 This is the top end of the spectrum, those who spend their summers in the South of France and their winters on the slopes. They exclusively shop at high-end supermarkets and still drive a top of the range (two-year-old) car. 

 A single person living this lifestyle would have a lifetime amount of £596,800 and an annual cost of £37,300.  

• House: Replace kitchen and bathroom every 10/15 years, costing £4,765.8 a year.
• Food: £144 per week
• Transport: 2-year-old car replaced every five years, costing £2,907.36 a year. 
• Holidays and leisure: 3 weeks in Europe every year, costing £2,778.72. 
• Clothing and personal: Up to £1,500 per year
• Helping others: £56

Again, for a couple, this is slightly higher, with a lifetime cost totalling £872,000 and an annual income of £54,500.    

• House: £4,765.80 per year
• Food: £238 per week
• Transport: £4,516 per year
• Holidays and leisure: £5,002.08 per year 
• Clothing and personal: £1,300 per person

The Research

Before, we highlighted that although Gen Z is investing money in their future, they’re also mainly interested in get-rich-quick schemes.  

However, it’s important to note that, when it comes to investing, it is incredibly unlikely that you will be able to “get-rich-quick”. That’s not what investing is about. The reality is that the longer you allow your investments to grow, the better position you will potentially be in when the time comes to retire. 

Our research illustrated what the total return of different monthly payments could look like by the time of retirement, based on the assumption that you retire at the standard age of 65 and live until 81 (the average life expectancy). We also looked at the difference it can make when you start investing earlier rather than later in life. 

According to the SEC, over the long-term, the US stock market has historically provided around 10% annual returns. However, we must stress that returns can vary wildly from year to year and an ‘average’ year is almost never in line with the average return. For this reason, average returns are only helpful when looking at the bigger, long-term picture and, even then, past performance is not a reliable indicator of future results.               

Let’s now remind ourselves of the price of each retirement lifestyle and the total cost for a single person: 

• Minimum = £204,800
• Moderate = £372,800 
• Comfortable = £596,800

Assuming a total annual return of 10%, investing £50 per month for 40 years could result in a total return of £279,939.79, enough for the minimum lifestyle. Investing £100 for 40 years, could result in a total return of £559,879.58, enough for the moderate lifestyle.  

Finally, investing £150 for 40 years could result in a total return of £839,819.37, a sufficient amount for the comfortable lifestyle. Please remember that these numbers have been calculated based on historical returns and are meant for illustrative purposes only. 

Here’s the full breakdown: