The time of true financial freedom has likely already arrived for those born on or before 1st September 1953 (Baby Boomers), but the future is not looking so bright for the Millennial generation (born between the early 80s up to 00s), who will face a more expensive and far longer financial struggle – according to a new study.
The study, which was carried out by retirement finance specialists Age Partnership, set out to find the true age of ‘financial freedom’ for the Millennial generation – with some interesting stats uncovered along the way.
Millennials (otherwise known as Generation Y) who began work at 21 and spend their younger years saving for a deposit, do not take out a mortgage until they reach an average age of 30. And to make matters worse, once they have a mortgage they will then spend 50% of their entire monthly income on bills!
Taking a look at earnings, the average wage for a Baby Boomer started at £10,140.96 in their first job aged 19, and were given an average 1.9% pay increase year on year, resulting in average lifetime earnings of £599,429.42.
This is comparable to today's Millennials, who have experienced a starting wage of £13,533.12 on average at the age of 21, with yearly pay increases of 3.7%, earning them up to £1,803,718.11 in their working lives.
Those born between 1940 and 1964 usually took out their first mortgage at the age of 22, with houses at the time costing around £4,975 at the start of the 1970s. According to the study, mortgages taken out by Baby Boomers typically took 33 years to pay off.
This is a huge difference to Generation Y, who battle housing costs of upwards of £220,000 on average, and who do not take out a mortgage until the age of 30. It may sound like the Baby Boomer generation had it easy when buying a home, but they were faced with fluctuating high mortgage interest rates of up to 16%, whilst Millennials are currently enjoying lows of around 4%.
Research also showed the average age of a first-time mum in 1980 was 23.5 years old, compared to Millennials who are waiting until they reach on average 28.6. The cost of raising a child who reached adulthood in 2003 was £140,398, whilst the starting costs for Millennials having children in 2013 begins at £222,458 taking into account factors such as childcare, holidays, hobbies and food, and we are yet to see how the economy will shape the true amount spent once these children reach age 21 in 2034.
By the time parents reached 51 and a half, most Baby Boomers offspring had moved out and become financially independent. This compares to the age of 58.6 for Millennials parents, as it is predicted that their children will be living at home until the age of 30 (at least), further increasing the cost of having children for Millennials, from an already hefty 25.2% of lifetime income.
Age Partnership's study revealed that the general age of retirement for Baby Boomers was 59.6 years old, but unfortunately Millennials won't be retiring until the age of 68. Not only that, but Generation Y also incur an additional cost of travelling for work, which can add up to a grand total of £90,826 over their entire working life.
All of this combined means that the Millennial generation will have paid off their mortgage, finished shelling out for their children, and finally retired, just one week before they reach the ripe old age of 70 – if they're lucky! Meaning 70 is the age of financial freedom for the Millennials.
Tim Loy, chief executive at Age Partnership, commented: "Retirement can be an opportunity to live the way you have dreamed about all your working life, whether that be taking up an interesting hobby, or travelling the world. Juggling finances as we come across necessary obstacles in our lives can be challenging, which is why it’s important for people to have access to information which will help them to make informed decisions about their future.
"Having a good idea of when you will be financially free can help you to enjoy your retirement to the fullest, getting the best quality from life, which is exactly what we aim for when helping our customers."
(Source: Age Partnership)
Mortgage debt increased by 11%1 to $201,000 last year and more than half (52%) of Canadian mortgage holders lack the financial flexibility to quickly adjust to unexpected costs, per a new Manulife Bank of Canada survey. This despite 78% of Canadians having made debt freedom a top priority.
The problem is most acute among Millennials, who saw their mortgage debt rise more than any other generation. Millennials are also most likely to have difficulty making a mortgage payment in the event of an emergency or if the primary earner in the household were to become unemployed.
"The truth about debt in Canada is that many homeowners are not prepared to adjust to rising interest rates, unforeseen expenses or interruption in their income," says Rick Lunny, President and Chief Executive Office, Manulife Bank of Canada. "However, building flexibility into how they structure their debt can help ease the burden."
Overall, nearly one quarter (24%) of Canadian homeowners reported they have been caught short in paying bills in the last 12 months. The survey also revealed that 70% of mortgage holders are not able to manage a ten% increase in their payments. Half (51%) have $5,000 or less set aside to deal with a financial emergency while one fifth have nothing.
1 The percentage change in average mortgage debt controlled for regional, age and income differences between the samples. However, different research providers were used for each wave of the study which may impact trended results.
Millennials not alone
Despite generally having more equity in their homes, many Baby Boomers face the same challenges as Millennial homeowners. Some 41% of Baby Boomers said that home equity accounted for more than 60% of their household wealth and for one in five (21%) it makes up more than 80%.
This indicates Boomers may need to rely on the sale of their primary residence to fund retirement, since much of their household wealth is wrapped up in home equity. However, more than three quarters (77%) of Baby Boomer respondents want to remain in their current homes when they retire.
"Many Boomers approaching retirement share the same lack of financial flexibility as Millennials," said Lunny. "They want to remain in their current homes, but their home makes up a big part of their net worth. Instead of downsizing, or even selling and renting, homeowners in this situation could consider using a flexible mortgage to access their home equity to supplement their retirement income."
Helped into the housing market
Almost half (45%) of Millennial homeowners reported that they received a financial gift or loan from their family when purchasing their first home. By comparison, just 37% of Generation X and 31% of Baby Boomers received help from family members when they purchased their first home. Conversely, almost two in five (39%) Boomers, many of whom are the parents of Millennials, still have mortgage debt.
The generational increase in new homeowners requiring family support comes despite a long-term trend toward two-income households. The number of Canadian families with two employed parents has doubled in the last 40 years, but housing costs are growing faster than incomes2.
"With higher home prices and larger mortgages, it's more important than ever to find the mortgage that's right for you," says Lunny. "A flexible mortgage that offers the ability to change or skip payments, or even withdraw money if your circumstances change, can help you ride out financial difficulties more easily."
Manulife Bank recommends that Canadians have access to enough money to cover three to six months of expenses.
2 Statistics Canada. May 30th 2016
Quebec homeowners most at risk
In addition, the Manulife Bank survey found that:
- Mortgage holders in Quebec (76%) would have the most difficulty with an increase of 10% to their mortgage payment and are more likely to be impacted should they have a fiscal emergency, as almost 30% have no emergency funds.
- British Columbia had the highest instance of homeowners getting help from family members when they purchased their first home, with almost half (45%) saying they either borrowed or were given money.
- Compared with other regions, homeowners in Manitoba and Saskatchewan (73%) prefer most to own and live in their current home when they retire.
Debt management should begin at an early age
More than two in five (44%) learned "a little" or nothing about debt management from their parents—and were also most likely to have been caught short financially in the past 12 months (28%).
"Kids who learn about money and debt management are more likely to become financially healthy adults," says Lunny. "One of the best lessons we can teach our children is the importance of saving for a rainy day. Being prepared for unexpected expenses is good for our financial health, good for our mental health and gives us the freedom and confidence to deal with the unexpected expenses and opportunities that come our way."
(Source: Manulife Bank)
