Setting up the next generations of retirees

With average life expectancies rising, early investment education and financial advice will become increasingly critical.

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It’s not a well-known annual event in Australia, but October 31 happened to be World Savings Day.

Established almost a century ago in Europe, the main purpose of World Savings Day is to encourage people around the world to improve their financial literacy and to put money aside for their future.

It’s a very good initiative, especially in the context of parents teaching their children about the role of money and the financial results that could be achieved by saving and investing over the long term.

But how does it play out in the real world? If you haven’t heard of Generation Alpha, you’ll probably be hearing more about them fairly soon. They’re the newest generation, and many of them haven’t even been born.

The oldest Gen Alphas, born in 2010, will have turned 13 this year. The ones yet to be born have until 2025 to be included, or they’ll fall into the next generation, which not surprisingly will be known as Generation Beta.

Based on Australia’s average annual birth rate of 300,000 children, there are already close to four million Gen Alphas. In another two years, the number will likely be closer to 4.85 million.

That’s a large cohort of future Australian investors – many of whom in the not-too-distant future will be earning wages and superannuation on their long journey towards retirement.

Teaching your children

Parents with Gen Alpha children, and even children at the younger end of the previous Gen Z generation, born between 1997 and 2012, should be taking a leaf out of the World Savings Day book to teach them about money and investing.

This can include teaching them how to save and set financial goals, how to budget, and about the power of long-term compounding returns – all skills and knowledge that will serve them well as they grow into adulthood.

Giving children some starting investment money can be highly beneficial as parents can use this as an opportunity to have meaningful conversations about money management, investments, and financial planning.

That is, by imparting financial knowledge parents can empower their children to make informed decisions about their personal finances as they grow.

Increased life expectancies

Australia’s population is set to increase by more than 50% over the next 40 years, according the recently released Intergenerational Report 2023.

By the 2062-63 financial year, based on the Treasury’s estimates in the report, average life expectancies will be higher than now. Life expectancies at birth are expected to rise from the 81.3 years for men and 85.2 years for women now to 87 years for men and 89.5 years for women.

By 2062-63 a quarter of the total Australian population will be aged 65 and over.

The people who Treasury is mostly talking about here are those in the Millennials generation, born between 1981 and 1996. The youngest of this cohort will have turned or be turning 27 this year, and the oldest ones are now aged 41 to 42.

Fast-forward to 2062-63 and the ages of Millennials will by then be spread between 67 and 82 – the people included in the age brackets at the upper end of the Intergenerational Report’s long-range population projections.

The eldest in the younger Gen Z generation will also be approaching or already in retirement by 2062-63.

So, why is all this relevant? In simple terms, the people referred to as “the younger generation” not that long ago are progressively getting older and moving ever closer to retirement age.

When they do reach retirement age, they’re likely to be living longer than those in previous generations and will probably need to rely on their accumulated savings for longer too.

Therein lies a challenge. This year’s ASX Investor Study found that young Australian investors are likely to be more risk averse than their older counterparts and less likely to tolerate moderate or high variability in their investment returns.

Many have low levels of investment diversification, which may also be counter-effective against their relatively high level of risk aversion. As a consequence, their end retirement balances may not be sufficient to sustain them through their extended retirement years.

Education and advice are key

It all starts with education. Setting up the next generations of investors is a process that should begin from a young age, with parents teaching their children the basics about money and finance and potentially investing on their behalf.

That can later be extended to them getting professional advice, which will become increasingly crucial for current and future generations of Australians over time.

Balaji Gopal, Head of Financial Adviser Services
November 2023 
vanguard.com.au