Young people at the start of their professional careers are in a very different situation to older people who are nearing the end of their careers.
Their circumstances are different. They don't usually have the same amount of assets. They have plenty of years of working ahead of them, and a greater degree of uncertainty about what the future holds. They may have young children or expect to have children.
Their needs are different. They probably have greater need for insurance, because they have dependents and don't have the assets to support them if something happened to them. They have different accommodation needs to empty nesters. The nature of their investments will be different.
And their objectives are different. Everyone's objectives are different, but it's clear that the financial and lifestyle goals of a thirty five year old will be different from those of a sixty year old.
Furthermore, the current generation of young professionals have unique challenges compared to previous generations:
- Not long ago, most households only had one breadwinner. In our generation, most households need both partners to work. This adds new stresses (who looks after the kids when they get sick, and who runs errands during business hours?) and additional expenses (childcare, cleaning). And because many of the most expensive things we buy, such as housing, are positional goods where the value isn’t tied to supply so much as demand relative to other people, they continue to increase as a proportion of our incomes as average household incomes go up.
- Many older people in the work force grew up at a time when university education was free. They didn’t end up with student loans. When we hit the workforce, many of us are a step or two back compared to the previous generation.
- Consumption and debt is more seductive than ever. We can spend money anywhere, at any time. We are bombarded with marketing that is increasingly targeted and sophisticated.
- Is superannuation going to be as generous for us in 30 years’ time as it is now? I doubt it. The superannuation age is rising from 65 to 67, and will probably rise higher. It’s likely that its value will be lower when we receive it, and we’ll be means tested. I am planning for my retirement on the assumption that superannuation will be trivial.
- On the other hand, our generation will finance baby boomers’ retirements and the health costs associated with their longevity. As long as the boomers are a significant voting bloc, they are likely to retain their benefits. Whether or not they have the money, they will want the benefits their tax dollars paid towards the previous generation, even though our generation will foot their bill. The bill we pay will be larger than what they paid, but the benefits we receive will be less.
- It is harder to get on the property ladder than ever before. Property is a higher multiple of income than it was for our parents. We need to save bigger deposits and make larger mortgage repayments.
- Technological change is rapid and has the potential to disrupt even the most sedate profession. There is a great deal of uncertainty about what the future holds, and very few people can feel truly secure about their prospects in the workforce.
- We are working in an economy that is becoming increasingly “winner take all”. It’s great for those who end up winning, but not everyone gets to the top of the slippery ladder.
- Most of the people who are in a position to advise young people, professionally or otherwise, grew up in a different environment. Not only that, their current perspective is influenced by the fact that they have financial tailwinds at their back. I guarantee that your perspective will be different once you’ve achieved professional stability and success, and you are approaching financial independence.
All of this may seem unfair, but I don’t intend for you to reach for your pitchforks. All I want to point out is the context in which we need to plan and be responsible for our financial futures.
And my prognosis could be wrong. Things might end up being better for us. Economic growth and technological development has often made things work out better than anyone could have expected.
Having said all of this, I think we live in a great time. I feel fortunate that I was born in 1980 and not in, say, 1950. We live in a wealthier world. I sleep better at night knowing that extreme poverty has plummeted during my lifetime. The social and technological progress we’ve seen is astonishing.
I’d rather be facing these challenges than living in a world without the internet, computers, smartphones, medicine as we know it, and the world as it stands. In the world of finance, we have low fee index funds; advisers who don’t take huge commission loadings from investments; good quality insurance products; access to tremendous amounts of freely available information; regulatory regimes that provide better consumer protection than ever; and initiatives like Kiwisaver. Sure, there are challenges and uncertainties ahead, but it’s an exciting time to be alive.