Holly Black: Welcome to the Morningstar Series "Ask the Expert". I'm Holly Black, with me is Justin Taurog, he's Deputy CEO of VitalityInvest.
Hello.
Justin Taurog: Good morning, Holly.
Black: So, we're talking retirement today. Which is actually something a lot of people don't want to talk about. So, what are the most common reasons that people don't want to save for the future?
Taurog: Well, Holly, I suppose I don't want to underestimate the impact of the current economic environment. So, maybe the pressure that debt market put on people in terms of saving. But I think the people generally if you look at it anecdotally can save more than they actually do save. And I think one of the key drivers, people don't is retirement is just so far away. You know, if someone is in their 20s, 30s, retirement is 40-50 years away, potentially. And I think people often tend to focus on short-term immediate instant gratification. You know, with Amazon Prime, you can order something it's there today, tomorrow. So, we tend to focus on things we can touch, we can consume immediately, rather than this retirement thing that might be – who knows what will happen on that journey to retirement. But you know that need to plan for retirement from a young age is so important.
Black: But I guess it's hard because there are so many conflicting things to save for. So, a lot of people want to save for a house or if they're starting a family, they might need some more rainy day money or want to put money away for their children's future. And retirement seems quite far down the priority list.
Taurog: I think that is the challenge. I mean, if you look at people coming out of university today, for example, I think the statistics are the average student debt is about GBP32,000. So, you come out of university, you got to pay back the student loan. And also, property prices are obviously so much more expensive. So, people are renting. So, if you look at your income, you've got student debt, you've got your rental, you've got obviously food and other expenses. So that can get in the way of saving for retirement. But you know, I think to me, the key thing is you got to get into that behavior early, and just start saving -- almost get accustomed to the 5, 10, whatever percent you can afford of your salary put into ISAs or retirement, whatever it might be.
Black: So, what's the best way to get started?
Taurog: I just generally think the best way to get started is to get that culture of saving. So, if you look at it today, I mean, the government has put in place a number of incentives for people to save, through auto enrolments, through your pension scheme, through ISAs where you can get some pretty decent tax benefits and reasons to save. So, I think it's just to get into that culture.
And I think maybe two things that I think can help. First one is it's just tools for people to understand, you know, what is my time – my time horizon, my planning horizon, how long am I likely to live? Because people tend to underestimate that. And also based on that how much am I saving? What income do I want in retirement? And how much do I need to save in order to fund that retirement? So, I think the one is firstly, just understanding how long you are likely to live, how much you need to save to find an income in retirement.
And I think the other side maybe is just – know just to help, if anyone wants to save. But I think just know just to help people save, whether it's tax incentives, whether it's use your ISA allowance. And what we do, for example, as we get people appease to their savings just to incentivize that regularity of savings. So, everything is just getting to that behavior and understand the benefit of saving early.
Black: And as well as underestimating our life expectancy, we underestimate how much we need to save. So, we should try and save more. And one of the best times apparently to do that is just after you've had a pay rise, which seems counterintuitive. Why is that?
Taurog: So, I suppose maybe if you just take a step back, I think if you look back in the 40s, I think somebody needed to save 4%, 5% of their income every month to fund retirement, because life expectancy was so short. Whereas now if you look at The 100-Year Life recently published a stat that for someone in their 30s you need to save 25% of your income every year in order to fund your income in retirement.
Black: 25%. No one has that to spare, surely.
Taurog: Well, I think that's the challenge. It's almost impossible for anyone – for most people to save that amount. So that's why even if you just start with a 5% or 10%, just go on that journey. And then as you're saying if you have a salary increase, you're getting an increase, it's money you haven't had previously. So, if you get, say, a 3% salary increase, take half of it, 1.5% and put that as an increase to retirement savings. Over five years, that's an extra 7%-odd of your salary you are saving every month. So just bold that up, you've never had that money, that pay increase, just get into that habit of taking part of that towards your pension.
Black: But rather than adding more to their savings at the moment, people are probably thinking about reducing it because they're worried the stock market is going to crash or we're going into recession?
Taurog: I think that's such an important thing – behaviour, really not following that. You know, just get into that habit of staying in the market. And if you've got a diversified portfolio of equities and bonds and cash and property, whatever it might be, you should just stay invested indefinitely. I think just on the research, which we've seen is if you miss the 10 best days in the market, over the 30 years – over 30-year period to probably 2016. If you just missed the 10 best performing days in the stock market, you'd have lost almost half of your growth. So to try and timing the market and to try and invest at the bottom and get out of the top is, unless you're a wizard is almost impossible. So, I just think you got to stay invested. Don't break that behavior of regularity of investing. As long as you keep investing throughout market cycles you should be fine. Just don't time it.
Black: Well, thank you so much for your time,
Taurog: Pleasure. It was lovely. Thank you
Black: And thanks for joining us.
