The need for effective retirement planning is becoming increasingly important as life expectancies rise and the global population ages. However, many individuals begin thinking about retirement savings too late, often only when they are approaching retirement age. One effective strategy to address this issue is to start retirement education earlier, but how much earlier is the million-dollar question.
The need for effective retirement planning is becoming increasingly important as life expectancies rise and the global population ages. However, many individuals begin thinking about retirement savings too late, often only when they are approaching retirement age. One effective strategy to address this issue is to start retirement education earlier, but how much earlier is the million-dollar question.
The case for early engagement
Starting retirement savings early can significantly increase the benefits of compound interest. When individuals begin saving more in their teens or early twenties, even modest contributions can grow substantially over decades. The earlier they start, the less they need to save each month to reach their retirement goals. A small amount invested at a young age can grow into a substantial sum by retirement age due to the power of compounding. Additionally, starting to save early not only helps with retirement but also instils a savings mentality at an age where it’s easy to fall into a credit or debt mentality, because access to credit is often more readily available. Engaging young people early can therefore lead to better financial outcomes and possibly reduce the need for larger, later contributions.
Financial literacy is crucial for effective retirement planning. By introducing retirement education in schools, college, or university, younger people have an opportunity to learn more about the importance of saving, how superannuation and pension schemes work, and the benefits of starting early. Understanding these concepts at a younger age could instil good financial habits that benefit them throughout their lives.
Ryan Gill, a High School Principal at a private co-ed school in Sydney notes, “There’s been considerable push in the last five years, and it started when students were seen or deemed to have low financial literacy… I worry about those students who don’t do any level of Commerce, as a subject, because there is no other place that they’re going get it [financial literacy] from.
Principal Gill observes from an Australian perspective, that even for those students who “elect to do business studies, they’re not going to have an in-depth knowledge of retirement planning. The motivation to learn general financial literacy is so much more profound than it would be to learn about retirement planning because it’s so far down the track… you know that despite the fact that you’re going to be joining a super fund immediately after you join the workforce this doesn’t seem like it’s a here and now.”
Current challenges and opportunities
In many jurisdictions, there are limitations on superannuation and pension contributions for younger individuals. For instance, in Australia, young people under the age of 18 must work almost full-time hours to receive superannuation contributions, which is often impractical. This restriction can discourage younger workers from engaging with their superannuation early on. Reforming these rules to make it easier for younger individuals to contribute to their superannuation could provide a significant boost to their long-term financial security.
In the UK, while pension contributions are not compulsory, the auto-enrolment system, which automatically enrols employees into their employer’s pension plan unless they choose to opt out, only starts at age 22. This policy is primarily due to concerns about affordability for younger individuals.
“The starting age could be reduced but with a much lower contribution level. Or, instead of lowering the age for auto-enrolment, it might be more practical to consider increasing the percentage of income contributed to pensions for those already participating as they get older This approach could help build savings without placing additional financial strain on younger individuals who may still be establishing their careers,” suggests David Simpson, Head of EMEA at GBST.
Today’s youth are more digitally savvy than previous generations. Leveraging digital platforms to provide retirement education can be highly effective. Interactive tools, educational apps, AI, and online resources can make learning about retirement savings engaging and accessible for young people. Governments and financial institutions should invest in these technologies to reach younger audiences effectively.
The role of government and the department of education
Governments, alongside the department of education, have an opportunity to take a more proactive role in integrating financial literacy into school curricula. This education could cover basic financial principles, the importance of savings, and how different retirement systems work. By making financial literacy part of education and not just an ‘extra’ school incursion for those educational institutions that can afford to fit it in, governments can help ensure that more students gain essential knowledge before entering the workforce.
Principal Gill acknowledges the difficulty that high schools can face when it comes to financial literacy education. “It’s important that we consider the wider context and why perhaps schools might be hesitant to include more within curriculum documentation. There are a huge number of really important life skills, several of them very worthy, but all are competing demands for the time that we have beyond the curriculum.”
Governments can support retirement education through funding and partnerships with educational institutions. Providing resources for schools to deliver engaging and relevant financial education can enhance the quality and reach of these programs. Additionally, governments could sponsor campaigns and workshops that focus on retirement planning for young people.
To be effective, retirement education programs must be engaging and relevant. Governments would need to work with educators and financial experts to develop curricula and materials that resonate with young people either in high school or at university age. This includes using real-life examples, interactive simulations, and multimedia content to make learning about retirement savings more appealing.
Encouraging early savings with incentives
Governments could also consider implementing incentive programs to encourage early contributions to retirement savings. For example, offering tax benefits for young savers can provide an additional motivation to start saving early. These incentives can help bridge the gap between the desire to save and the actual practice of saving.
The broader impact
Starting retirement education early not only benefits individuals but also has broader societal impacts. By fostering a culture of financial responsibility and early planning, governments can reduce future dependency on social safety nets and improve overall economic stability. Additionally, retirement literate individuals are better equipped to make informed decisions about their savings, investments, and retirement plans.
Principal Gill sums up, “If it’s really something that the government want students to have the basics of, they must ensure it is within the curriculum because that’s the only real way in which you get more universal coverage. But I still question the validity of that decision in high school, when the priority, I think of most teachers is the shorter to medium-term, as opposed to the very long-term planning.”
Conclusion
Incorporating retirement education into the early stages of personal finance education is a crucial step towards ensuring a financially secure future for individuals. Governments can play a vital role in this process by simplifying contributions rules, integrating financial literacy concepts into high school curricula, and supporting engaging educational initiatives for young adults, post high school. By investing in early retirement education, we can empower young people to build a solid foundation for their financial future and enhance overall economic resilience – although high school may just be a bit too early to go into too much detail.
Posted in: Wealth Management Administration