Investing is interesting, but retirement feels too far away
Recently, in a discussion with young people, we talked about their attitude towards finances. Even those who have just finished school claimed to have saved enough to calmly, without stress and pressure, consider their future life choices. Modern young people are well-versed in technological solutions, have theoretical knowledge about financial markets, and even form clubs where they learn to invest together with their peers.
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Youth interest in finance is also confirmed by various surveys. For example, a study conducted last year by SEB bank showed that Lithuanians aged 18–29 more often than other age groups claimed to have enough knowledge about various financial instruments to be able to invest. Moreover, they used the knowledge gained – about one fifth (22%) of respondents aged 18–29 had already invested in company shares, while in the 30–74 age group, fewer people had invested in shares, about 12%.
It would seem we could be happy that young people’s financial knowledge is strengthening. However, the pension reform implemented this year revealed another trend: young people more often than older ones decided to withdraw funds from the second-pillar pension funds. In the first half of this year, those under 35 and those whose income did not reach the average wage more often withdrew from savings.
Could it be that a generation with more financial knowledge understands what and why should be done, but still lacks the motivation to change the established financial behavior models in society?
From a demographic perspective, the world is divided into two parts
It is difficult for young people to think about the distant future, so they often see investing as a way to save money for studies, travel, or housing and to gain more financial independence. When asked about retirement, young people are open – old age seems too far away to worry about now. This attitude is understandable but irrational in the long term. There are at least two important reasons for this.
The first is the demographic situation in Lithuania and all of Europe. Birth rates are low, so societies are aging rapidly. As a result, the proportion of people of retirement age is increasing in European countries, while the relative number of working people, whose taxes finance part of the pensions, is decreasing.
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Therefore, it is no longer possible to expect that the desired standard of living in old age will be ensured solely by the state pension. It is estimated that with worsening demographic indicators in Lithuania, the state pension in the future could amount to only about 30% of the pre-retirement earned income. And to maintain a similar standard of living as before retirement, it is usually aimed to secure at least 70–80% of previous income.
Young people have an advantage that decreases every year
The second reason is even more important for a young person. The youngest workers have something that later cannot be bought with any money. They have time.
Even small amounts regularly set aside and invested for several decades can help accumulate significant capital for old age. The longer the investment period, the stronger the compound interest effect: investment returns are earned on an increasingly larger accumulated capital amount.
Therefore, youth, when retirement seems least relevant, is the most favorable time to start preparing for it. For example, by investing 4% of the average wage monthly for 40 years, it would be possible to accumulate about a quarter of a million euros by retirement. The investment period has the greatest impact on the final amount: deciding to save for 20 years instead of 40 would require setting aside about one-fifth of the salary monthly to achieve the same result. Of course, this example is theoretical and based on historical financial market returns, but it clearly illustrates how important time is in investing.
It is important for young workers to understand that each year of delay reduces one of their greatest advantages in financial markets – time – and increases financial pressure in the future. It is important not only to understand financial phenomena and start the investment journey but also to clearly choose its direction – consciously decide what kind of future will be desired after 40 years.
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