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Everyone has their own pace and priorities in life and, ostensibly, there’s nothing wrong with that. Some will get married in their 20s, others in their 50s and others not at all. Some will buy a house and others won’t, and who’s to say what’s the right approach?
While in terms of overall happiness, this might be the case, unfortunately when it comes to managing your finances, meeting the typical financial milestones late does have a negative impact.
Again, many people will do just fine by taking the longer road, but there is no doubt that starting everything later will have an impact on your overall finances.
As Rachel McGovern, director of financial services with Brokers Ireland, says, “Being forced to pay rents that are much higher than the cost of servicing a mortgage means normal financial milestones are being missed and this will have long-standing consequences into the future”.
Unfortunately, while it’s easy to point out these dangers, overcoming them is a lot more difficult due to a combination of soaring rents, contract jobs and prolonged education.
We’re doing everything later these days. In years gone by we started school at four, now it’s commonly five; many people left school at 16 – now it’s usually 18, if not 19. A degree usually meant just that; now it’s a stepping stone to further education that can also encompass a master’s and even a PhD.
This means that all the typical milestones are being pushed out.
“What we’re doing now in our 30s, our parents did in their 20s,” says Sarah McGurrin, co-founder of Orca Financial/Oomph.ie.
1 Starting your first ‘proper’ job later
Internships, unpaid internships, contracts, gig economy jobs. While flexibility can be an advantage, when it comes to holiday pay, sick pay, pensions and job security, it’s hard to beat a full-time, secure job.
However, many graduates and school leavers alike are finding it is taking longer to achieve that full-time pensionable job status, both because education tends to last longer and because companies have become more inclined to offer contract positions first.
If you start earning a graduate salary, say, at the age of 25 or 26, compared with 21 in years gone by, it may take you longer to grow that salary, which puts pressure on your ability to save for a home.
If you're starting work later, it may make sense to keep working – where possible – later
Or a pension. After all, a more flexible working life may also mean that it will become more difficult to qualify for the State pension, which could be worth about €250,000 to you.
"Security is not there any more," says Nicholas Charalambous, managing director of Cork-based Alpha Wealth. "People haven't really got a job for life. It doesn't apply any more".
As he notes, if you were born in 1961 or after, you won’t get the State pension until you’re 68. And getting it has become more difficult as, under the current regime, you must have paid at least 520 full rate social insurance contributions and have a yearly average of at least 48 paid and/or credited full rate contributions from the year you started insurable employment until you reach 66. Those rules are due to be streamlined, however.
Still, if you’re starting work later, it may make sense to keep working – where possible – later. Back in the 1980s life expectancy was just 72.55 years of age: now it’s 81.61.
While most companies still have a retirement age of 65, the State pension age will soon jump to 68. For McGurrin, this means that employers will probably start to increase their own pension ages. And if they don’t, they may be forced to do so, on age inequality grounds.
“I genuinely think there will be a case brought before the courts if not,” she says, adding, “I think it will be unusual to retire at the age of 65”.
2 Buying a house later
“In the 1980s the average age to buy a home was 23 or 24. Now it’s 34,” says McGurrin, adding that buyers in the 1980s and before would also have had mortgage terms of just 20-25 years. This meant that their mortgage was paid off long before they thought about retirement, sometimes before people turned 50.
These days someone buying at 34 might lock into a 35-year term mortgage, which means they will still have a mortgage when they’re 69 – and probably retired.
“It means you’ve got a lot of stuff bundled into your 30s, you’re condensing too much into a short time frame,” says McGurrin.
Banks still don't like to lend to you when you're in retirement
Starting earlier also means trading up is a much more manageable goal. But if you only buy your first house at 35, for example, you might not be ready to trade up until you’re in your 40s – and by then the mortgage term available to you will have shrunk, making repayments on a larger home potentially unaffordable.
Banks still don’t like to lend to you when you’re in retirement. While it may have been a fairly common practice in the run-up to the crash, McGurrin notes that this may have been “slightly negligent” as people didn’t have repayment capacity.
However, as people live longer – and potentially stay in the workforce longer – banks may change their tune on this.
This issue is obviously compounded by rapidly rising house prices compared with modest income growth, making housing less affordable.
3 Starting to save for a pension later
It’s an obvious follow-on from starting your first “job” later. If you’re employed on a poorly paying internship, or on a contract basis, you most likely won’t be part of the company’s pension scheme, and so won’t start saving until you’re older.
Back in the day, McGurrin joined Irish Life as an 18-year-old and was promptly enrolled in their pension scheme.
“I thought it was a waste of money,” she recalls. Now she very much sees the value of such an automatic approach.
According to Irish Life research, people on average start saving for retirement aged 37; already very late. If employment trends continue, it could get even later. This can have a dramatic impact on your financial health in retirement. Consider the following example from Charalambous, which shows that the difference between starting a pension at 25 and 35 could be an extra €194 a month, if someone is looking for a private pension of €17,100 per year.
“Someone who starts at 25 would have to save €238 a month gross. But a person who starts at 35 would have to save €432 per month gross. And if you put off until 45 years of age – you would need to put €864 a month.”
And those who came of age post-bust also have to contend with less generous employers. For them, the promise of a proportion of their final salary as a pension is something even their parents are unlikely to enjoy – never mind themselves.
If you have the option of an employer contributing to your pension, take it up
Pension experts typically suggest that you need to be putting away about 15-20 per cent of your salary each month (including contributions from employers) if you want to retire on half of your salary.
But how many employers are contributing enough to help people achieve this? Late last year, the IAPF drew up a new benchmark, the PQS, to recognise generous employers. But no employer was awarded the top rating, indicating that they had a minimum employer contribution of 15 per cent.
Some of the better employers in terms of pensions savings include Allianz, ESB, AIB, Smurfit Kappa and Microsoft, as they have a minimum employer contribution of 10 per cent.
But if you have the option of an employer contributing to your pension, take it up. McGurrin has a client company that pays in 15 per cent to employees’ pensions – but just 35 per cent of the workforce are members of the scheme.
For some, there could be encouragement in the form of the Government’s proposed auto-enrolment pension scheme, which would see everyone aged 23-60 and earning more than €20,000 automatically enrolled into a pension scheme – one their employers have to contribute to – though suggested contributions levels are certainly lower than 15-20 per cent.
While employees will have to give up up to 6 per cent of their salary, this will be matched by a similar contribution from their employer, as well as a further contribution from the Government. A proposal since 2006, it remains to be seen if the launch date of 2022 can be attained.
4 Having children later
The average age of a woman when she gives birth for the first time is now 32.5 – up from 26 back in the 1990s – while births to women in their 40s have soared by 63 per cent since 2005. For many families, having children later means you may be in a better position to afford them, having better established yourselves in jobs.
However, the downside of this is that at a time – early 40s, for example – when you might be thinking of making one final move in the property market, or of renovating your current home, you are still dealing with creche costs.
And having a child in your late 40s/early 50s means you may also be pushing out the time when you really start to prioritise your pension. Not only that but you may actually still be struggling with college fees when you retire.
And children typically need to be supported financially for longer these days.
As McGurrin notes, previously financial advisers would have quoted life assurance policies based on a term that matched the person’s children turning 21; now it’s 25. So not only are you paying life cover for longer, but you’re also financially supporting your children for much longer.
