Millennials who take risks are likely to benefit
The generation of millennials - those aged 25-34 years - stand to benefit from a higher-risk portfolio, according to new research by Close Brothers Asset Management.
To achieve a retirement income of £16,000 in today's prices, a 25-year old individual earning £25,000 a year would need to accumulate savings of roughly £500,000 by 65.
If they saved in cash, with annual interest of 1 per cent, they would have to put aside £6,900 per year, representing more than a quarter of their gross annual income.
But, the report argues, if they opted for the equity-focused higher-risk approach appropriate to a typical saver of their age, they would only have to set aside around £1,500 per year. By adopting a higher-risk approach, which involves accepting that in some years their savings might fall in value, they will need to save far less of their income today.
Since 2002, market movements have benefited younger pension savers, who typically favour a higher-risk portfolio more weighted towards equities.
Millennials would be expected to favour a higher-risk portfolio with over 95 per cent of their assets saved in equities, with the remainder in other assets.
At the end of the first quarter of 2016 they had defined contribution pension savings of £5,385 on average. The impact of market growth means that this would have been worth just £2,001 in 2002, excluding the impact of any additional contributions - an increase of 169 per cent.
That higher-risk approach meant that millennials' pension pots were hard hit in the 2008 financial crisis, almost halving in value from around £4,200 to under £2,400; but they recovered rapidly, more than making up those short-term losses.
As the report points out: 'Retirement may be 40 years away, while a bear market only lasts 15 months on average. Investors should focus on the long term.'
Andy Cumming, head of advice at Close Brothers Asset Management, says: 'People cannot escape the need to save more, but it's all the more important that they understand how financial markets can do a lot of the heavy lifting.
'If savers opt to take no risk, or simply stuff cash under the mattress,' he adds, 'they will never hit retirement goals, or would have to set aside increasingly unaffordable sums while working.
'Simply setting aside money isn't enough. You have to set it aside in the right place, unlocking the potential for long-term growth.'
The report sums up: 'Starting young so we have long enough to prepare, saving enough so we balance our consumption between early and later life, and saving smart, taking enough risks so we don't have to sacrifice too much income today to secure one in the future. These are the keys. The markets will do the rest.'