The Lemon Fool

Our kid is now 21 years old, and while I've mentioned saving and investing in the past to him, I thought I'd ask how his retirement fund was getting on. All casual like.

But then I considered:

1. He has approaching £35K of student loan debt: a tax on his future earnings.
2. The student loan makes it harder to save for a deposit on a house. He may be paying perhaps more than half his income on rent.
3. Points 1 and 2 mean he will have significantly less means to save for retirement.
4. Even if he did manage to save for a pension, annuities are rubbish and relying on the markets means you have to have a lot to cushion volatility.
5. The state pension is likely to be tiny and he may have to work until he's 80 before he gets it.

So I thought better of it as didn't fancy getting a smack in the mouth.

But does anyone have a different take on this (that doesn't involve spending less on Avocado toast)? I suppose some miracle might mean annuities make a comeback? UBI? What?

One of our big priorities was to make sure our kids(3) had no student loans on exiting university
How they would ever manage to buy a house,marry and have kids etc… with this burden hanging over them from the get go beats me
Girls are particularly hard hit as they often have time out from work to have children
We did manage it,now all married with kids and no student loans!
I would seriously question the value of a degree if it inflicts such a life time load on a child
I do think parents should take on this cost if degrees are contemplated-We promised ours 5 years of study each -big burden for us but turned out to be worth it
xxd09

I think you are being overly dismissive of the state pension in the first instance.
Pretty much everyone who does jobs that you actually need done but don't want your kids to do is relying on it.
Then once somebody is getting it, the middle class with some political clout won't be left out

Then there is death thing, which nobody likes to talk about.
Unless a generation uses up 200 years worth of accumulated economic growth by being less economically active than they could have been, it ought to be fine.....
There will be some messy distribution problems that might need sorting out but really once 3 generations of a family have bought a house, with life expectancy of 90 and kids turning up a third way through you should just roll them over shouldn't you?
I have certainly seen this in my circle, though what happens in practice is the eldest owns 2, the middle aged own most of one and the youngest have debt.
Which is where w came in.

W.

Gilgongo wrote:Our kid is now 21 years old, and while I've mentioned saving and investing in the past to him, I thought I'd ask how his retirement fund was getting on. All casual like.

But does anyone have a different take on this (that doesn't involve spending less on Avocado toast)? I suppose some miracle might mean annuities make a comeback? UBI? What?

What kind of retirement does he want? What current standard of living does he want? How compatible are those 2 desires?

When does he consider he can/will save for that retirement? How will that deliver the answer to question 1?

Student debt isn't a traditional debt. As you say it is a contingent future tax.

Can he reduce rent? Live at home? Share? Move to a cheaper part of the country?

Liklihood of inheritance?

Annuities, and their rates, have very little to do with pensions now for 21 year olds.

1) They can inherit your SIPP
2) Of course you have little spare cash at 20. But if you keep a frugal lifestyle you'll be making progress by 30, and will have excess cash by 40, with still 30 years to fund a pension.

xxd09 wrote:We promised ours 5 years of study each -big burden for us but turned out to be worth it

Money can't buy you happiness. We did in fact talk about this with him, and at the time he agreed: the lifetime feeling of obligation/resentment/emotional toxicity for bailing him out of a huge loan may outweigh the financial utility of it. And besides, it's not really a loan and might even end up costing you £30K for nothing:

https://www.moneysavingexpert.com/stude ... dent-loan/

As to the prospect of inheritance, sure. But markets are markets, and we may well all have to pay for private health care USA-style by 2050 at this rate (look at American personal finance boards: they're all saying they need literally 5x more than we do to allow for medical care in retirement).

The other answers are are all very sensible as well (not that I understand what Wuffle's means, mind you) but I am of a generation that did NOT have to do things like live at home, share, move to Scotland etc. We got a degree (mine's an arts BA - not vocational), got a decent wage, got married bought a house and were saving about 20% of income no problems by 35. He has a very low prospect of achieving that even on his computer science degree from a good university.

dealtn wrote:What kind of retirement does he want? What current standard of living does he want? How compatible are those 2 desires?

At the age of 21 I would very much hope that's an impossible question to answer

Gilgongo-fully understand your reasoning
I am not sure youngster’s appreciate what a serious problem debt can be
Did I read somewhere that the government had sold the student loan book to a commercial lender with all that means re ruthless application of interest rates-hope I am wrong-6% was mentioned-you would never get clear of that
I have my first grandchild at medical school (female) no loans -parents paying
xxd09

xxd09 wrote:I am not sure youngster’s appreciate what a serious problem debt can be

Well yes, but it may not be best to think of a student loan as a debt in the same way "normal" unsecured debt. Have a look at that link which explains why. My point though is that student debt is part of, not the whole, of the problem.

xxd09 wrote:I am not sure youngster’s appreciate what a serious problem debt can be

Well yes, but it may not be best to think of a student loan as a debt in the same way "normal" unsecured debt. Have a look at that link which explains why. My point though is that student debt is part of, not the whole, of the problem.

xxd09 wrote:I have my first grandchild at medical school (female) no loans -parents payinh

The potential for that to poison a relationship is there, and 40+ years is a long time. Each to his own, but personally I'd not do that.

Gilgongo wrote:And besides, it's not really a loan and might even end up costing you £30K for nothing:

I'm not sure what you mean by 'not a loan'. The fact repayment is linked to earnings etc?

Either way, for mid-earners, i.e. those who earn enough to hit by repayments, yet not enough to get on top of it and clear it, it can end up costing a great deal more that £30k.

If you wish to help out but not have the downsides you mention, maybe offer an interest free or low interest version of what is implemented to avoid both issues?

Wuffle wrote:I think you are being overly dismissive of the state pension in the first instance.
W.

I would NOT tell anyone to rely on the state pension
I was told not to in my late 20s and was advised to start a workplace pension (that was many years before they bcame compulsory)
I have had lots of advice on all sorts of things over the years, but financially THAT was the best one by far
It's the only way of saving where someone else puts in for you as well (HMRC)
and the sooner you start the better

Gilgongo wrote:

dealtn wrote:What kind of retirement does he want? What current standard of living does he want? How compatible are those 2 desires?

At the age of 21 I would very much hope that's an impossible question to answer

Well it might not be easy to answer, but that's why it's the crux of the problem. Pretending it's impossible, or not to be considered at the age of 21 is at the root of why either today's living standards, or that of the future, will be inappropriate.

pje16 wrote:

Wuffle wrote:I think you are being overly dismissive of the state pension in the first instance.
W.

I would NOT tell anyone to rely on the state pension
I was told not to in my late 20s and was advised to start a workplace pension (that was many years before they bcame compulsory)
I have had lots of advice on all sorts of things over the years, but financially THAT was the best one by far
It's the only way of saving where someone else puts in for you as well (HMRC)
and the sooner you start the better

Depends what you mean by "rely on". Part of my retirement modelling relies on the fact I'll get a full state pension in 4 years time. But of course it's not the only thing I'm relying on, otherwise I wouldn't have been able to retire 8 years ago.

(At current annuity rates the state pension would cost at least a £300,000 lump sum to replicate. It's not trivial.)

Scott.

We all get auto enrolled into a workplace pension. Minimum total contribution of 8%. Many employers pay more. If starting at 21, working until probably 70, got 49 years of decent contributions, with tax relief and stockmarket growth. Maybe more than 50 years by then as living longer.

Also have state pension, which likely to continue in some form. And if nominate as beneficiary of your pensions. Not as bad as many think. That's as long as don't opt out, and have parents in work not retired spending on cruises etc!

Adamski wrote:We all get auto enrolled into a workplace pension.

Yes of course i forgot to metion that bit
but I have have put in more than the basic 3, 4, or 5 % for the last couple of decades

Gilgongo wrote:4. Even if he did manage to save for a pension, annuities are rubbish and relying on the markets means you have to have a lot to cushion volatility.

There are better ways of getting income in retirement than buying an annuity, although things might change in the next 40 years.

If he does start saving he should use a SIPP and invest in equities. Salary sacrifice might be a route.

TJH

Gilgongo wrote:Our kid is now 21 years old, and while I've mentioned saving and investing in the past to him, I thought I'd ask how his retirement fund was getting on. All casual like.

But then I considered:

1. He has approaching £35K of student loan debt: a tax on his future earnings.
2. The student loan makes it harder to save for a deposit on a house. He may be paying perhaps more than half his income on rent.
3. Points 1 and 2 mean he will have significantly less means to save for retirement.
4. Even if he did manage to save for a pension, annuities are rubbish and relying on the markets means you have to have a lot to cushion volatility.
5. The state pension is likely to be tiny and he may have to work until he's 80 before he gets it.

So I thought better of it as didn't fancy getting a smack in the mouth.

But does anyone have a different take on this (that doesn't involve spending less on Avocado toast)? I suppose some miracle might mean annuities make a comeback? UBI? What?

A different take would be interest rates are not 15%. In 1971 the top rate of income tax on earned income was cut to 75% I think it was 90%.

These days it seems thing are more affordable but the difficulty is getting the deposit for a house. It might be better to give them that rather than pay off student debt.

I know some people in similar circumstances but they seem to struggle to keep saving towards there deposit goal. There is always a nicer car, better gaming computer etc that keeps decreasing the pot. Interest rates are a double edged sword as saving doesn't generate much interest.

Staying with parents whist saving and selling the car to put down a deposit is so old fashioned apparently. It worked for many but going online with you buddies complaining how much rent you have to pay after spending £5K on your latest rig ..............

It’s absolutely a question of priorities
The young-I was one once! -think they will live forever and have little concept of the future also understandably feel that they know better than their parents about everything
Sadly this is not usually true
Houses ,marriage, kids and pensions cost -if that’s what you want -most people seem to desire these items
These facts are not uppermost in youngsters minds obviously but parents should try not to burden youngsters with debts especially before they suddenly realise that 75 years is all we have and the reality of what being an adult is kicks in
Student loans strike me as adults loading kids with adult responsibilities before they -due to their youth - are able to understand what they are getting into-this is not parenting as I understand it
xxd09

Thus it was and ever shall be.
I came out of secondary school in the peak of the Thatcher recession in the early 80s. I spent five years working at the fag end of capitalism before deciding to get me some more book learnin and wasting most of my 20s at university, only to emerge into another downturn in the early 90s.
I ended up not settling until my mid-late 30s, but now, in late 50s should be able to retire comfortably in a year or three. The point is you can go from dole queue to decent retirement even if the early outlook is not that rosy.
Every generation has never had it so good, nor had it more difficult.

xxd09 wrote:Student loans strike me as adults loading kids with adult responsibilities before they -due to their youth - are able to understand what they are getting into-this is not parenting as I understand it
xxd09

I think you are missing Gilongo's point. Student Loans may have a name which incorporates the word "Loan", but they are not a debt in the way that you are interpreting it. Loan is a misnomer IMO. They are more like a targeted tax. You get taxed the tax if you earn enough and if you are young enough. After about age 40 it is no longer payable. What other debt can you name that is linked to your income (not repayable if your income below a certain level) and only payable below the age of 40?

A more accurate name for the thing would be Graduate-Tax Funded Grant or some similar. So it seems to me that you deprived your offspring of a grant, or at best paid a huge lump sum up-front to relieve them of a bit of taxation in their 30s.

GS