The dog days of summer led me to think about the JAMs – the ‘just about managing’ group of the population – as some alarming statistics from NEST show that 26% of working-age adults in the UK have no rainy-day savings, and only 42% have £500 or more on hand.
Much research has also been done into the US market, where evidence shows that many workers who were ‘nudged’ into 401k plans appear to be offsetting those savings by taking on more auto and mortgage debt than they otherwise would have. The picture is rather more nuanced than at first glance, as taking out loans from 401k plans (which is, of course, permitted in the US) has enabled many to get on the housing ladder and benefit from more favourable mortgage terms. It does, however, beg the question: is saving for retirement a wise and rational decision if an individual is shackled with elevated levels of personal debt?
A recent TED talk by Elizabeth White placed a startling focus on the predicament of many US baby boomers who have lowered their living standards to take account of low or no retirement income, having under-saved during their most prosperous years. Millennials are in an even shakier predicament with high levels of student debt, low home ownership and, in the US in particular, rising health-care costs.
Given these stark facts, it is tempting to throw in the towel and give up on the prospect of retirement saving. However, against a backdrop of a government safety net that is wearing thin owing to demographic trends (we are all living longer), failing to make provisions for one’s long-term retirement is just not an option.
With individuals walking an ever more precarious financial tightrope as their debt burdens have grown, either through education-related costs or overstretched credit-card liabilities, it is all the more imperative for default fund design to be appropriate. While there is a place for growth assets in the early stages of the lifecycle, once the contributions have reached a reasonable size, a capital-preservation focus – through a diversified, low volatility portfolio of assets – is important. This can help to ensure that individuals do not become disenchanted to the point of opting out of their DC scheme, thereby forgoing the valuable tax advantages that it offers, not to mention the benefits of long-term compounding.
Pleasingly, the US research I alluded to earlier did conclude that, despite many having higher debt levels, generally 401k savers were in a better position than their pension-free counterparts and that their decision to climb on the housing ladder did not prove an irrational one as they benefited from rising property prices. While perhaps one could say that they were lucky in terms of timing, the fact that it did not undermine their financial security and that they did not choose to opt out of their 401k plans is indeed a small victory for the auto-enrolment project.