A (new) design for life

The good news: Millennials are set to benefit from an inheritance boom. The bad news: it won’t happen until they’re in their sixties. How does that shape their attitude to money? And how will they fund their future in the interim?

A (new) design for life

Illustration by Jon Link. Words by David Burrows

Stop buying avocado on toast and start saving for a house. That was the headline-grabbing advice last year from an Australian real estate developer to Generation Rent. Not surprisingly, Millennials reacted with indignation to this simplistic solution to their housing woes.

Some lucky youngsters will get a hand up onto the property ladder from the Bank of Mum and Dad. And many are are in line to inherit a large slice of their parents’ property assets – but not until they’re approaching retirement themselves. Rising life expectancy means that the inheritance boom is not set to peak until 2035. In the meantime, how will Millennials create a financial future?

A new approach to work

Millennials are the first generation whose lives won’t follow the traditional three stages of education/training, work and retirement. This generation is likely to have a multi-stage life, they will reskill and retrain, dip in and out of employment and self-employment. Their attitude to work and careers is very different from the Baby Boomers’ as Dr Eliza Filby, a historian of contemporary values and generations expert who lectures at King’s College London explains: “Millennials as workers prize different things from previous generations. For instance, they prize training in the workplace, and they want to know that the job they have will provide education, training and development for them.”

This idea of an attractive working environment offering plenty of opportunities ties in with a general acceptance that modern workforces are more mobile now. While Baby Boomers were more likely to stick with an employer for decades, Millennials will typically move multiple times within their career and often enter the self-employed world.

Legacies may eventually boost their finances, but until then Millennials need innovative, agile products and services

Gym membership vs pension

While being a ‘free agent’ (job hopping to speed up career progression) can be viewed positively, there is a downside. If a Millennial expects to stay in a job less than three years, there is less onus on building up benefits attached to their role. By contrast, some Baby Boomers will have accumulated 20 or 30 years’ contributions into a single company pension scheme – the fortunate ones into a final salary scheme. This huge differential goes some way to explaining a point that Dr Filby makes about millennial workers prizing gym membership over a pension scheme.

It will come as no surprise that Millennials also have different savings and investment mindsets compared with the long-term, stable accumulation of previous generations. These different habits are as much a result of circumstance than anything else. They may be the most educated generation in history (on a global scale 60% of Millennials have a first degree, 32% of them have a second degree), but with this often comes high levels of student debt (typically £30k-£50k in the UK) carried over from their undergraduate years. Add to this wage stagnation and high rents/housing costs, and it is evident that saving and investing for the future is particularly challenging. What’s more, debt has been normalised at the same time as saving has been disincentivised, thanks to a low interest-rate environment.

A sound financial education

Given these challenges, how can Millennials build their own wealth? The starting point may be financial education. This generation knows more about payday loans and short-term savings than longer-term and balanced investments. So how should the financial services industry engage with Millennials? Providing transparent, jargon-free, accessible information from credible sources is certainly a good starting point in the era of fake news. Millennials may lack investment knowledge; but they are fast learners.

But living with debt from a relatively early age does not mean they are cavalier in their attitude towards borrowing. According to a recent report from MoneySuperMarket, over a fifth of 18-24 year-olds admit to changing their money habits to present themselves as financially responsible, compared to just 9% across all age ranges.

Appearances matter

How information is presented is important too – this is the generation that heads to YouTube rather than Google or a company website for enlightenment. Educational content needs to be engaging, highly visual and delivered via digital and video media.
Accessibility and clarity of presentation are important, but as Dr Filby explains not only are digital and video media a must, so too is the ‘gamification’ of Millennials’ finances.

In its simplest terms, this might involve using ‘micro-saving’ or ‘micro-investing’ apps that hoover up virtual change from daily spending on a debit card and funnel it into a savings account or investment portfolio. Or it might involve sending a push notification to a Millennial’s smartphone asking them if they really need a second flat white or soy latte that morning.

On a more sophisticated level, it could mean showing Millennials avatars of their future selves and lifestyles based on their current savings and investment behaviours. This could then form the basis of a cogent, bespoke and long-term financial plan.

Principles and profits

It is also important to understand what investments Millennials are comfortable with. For instance, numerous studies show that they are more likely to focus on environmental, social and corporate governance issues (ESG) than older investors. They are also more likely to react if they believe their money is invested in companies with poor ethical or environmental track records – for instance child labour, animal testing or pollution. Investment providers need to be clear about how and where they invest on an ongoing basis.

Understanding risk

When it comes to investment risk, one would assume Millennials would largely accept more risk in their investments in return for potentially greater rewards. After all, they have time on their side given that they expect to work well into their seventies. However, research shows that they are far from gung-ho with their investments and tend to favour more cautious investing.

This may well be the legacy of the financial crisis of 2008. It may also be due to the fact that with less disposable income (as a result of paying down debt) they are more conservative in their attitude. Investment risk is a lot more palatable when you have other money (liquid assets) to fall back on.

Clear messaging

Of course, one of the challenges for the industry is to remind Millennials that being too risk averse is risky in itself. For instance, sitting on cash in the current environment provides a false sense of security. Stock market investment does entail risk; but Millennials benefit from the fact that they have the potential to ride out any market slumps as their investment time horizon is decades long. The message that needs to be conveyed is that time is on their side. Even with limited disposable income, saving as early as possible into tax efficient investments such as pensions and ISAs makes good financial sense. It can always be scaled up later on.

Breaking the mould

The Millennials present a challenge – the industry paradigms that served the Baby Boomers well are not as suited to their offspring. Generous inheritances may eventually boost their finances, but that’s unlikley to happen for another couple of decades. In the interim, the Millennials will be looking for more innovative, agile products and services to help secure their future.

Legacies may eventually boost their finances, but until then Millennials need innovative, agile products and services

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