Financial Advice for Our Grandchildren

Older couple with their grandchildren

I am classed as a Baby Boomer, born in the years following the Second World War, when there was a temporary marked increase in the birth rate, up until 1964. If we have grandchildren we look at their lives and the possessions they have and would find it hard to describe our upbringing to them.

Many of us will remember the “The Four Yorkshiremen Sketch” from At Last the 1948 Show (1967) where four men dressed in dinner jackets and sipping wine tried to outdo each other with just how terrible their life was as children. This sketch was created by Marty Feldman (MF), Graham Chapman (GC), John Cleese (JC) and Tim Brooke-Taylor (TB) before it was made famous by Monty Python.

This including such wonderful lines as:

MF: In them days, we’d a’ been glad to have the price of a cup o’ tea.
GC: A cup ‘ COLD tea.
JC: Without milk or sugar.
TB: OR tea!
MF: In a filthy, cracked cup.
JC: We never used to have a cup. We used to have to drink out of a rolled up newspaper.
GC: The best WE could manage was to suck on a piece of damp cloth.
TB: But you know, we were happy in those days, though we were poor.

If you are too young to remember this or just want to reminisce have a look here

The problems for Generation Z

If you have grandchildren aged 9 to 26 these are classified as Generation Z, those currently perceived as being familiar with the internet from a very young age. These youngsters are living in the most prosperous period in human history.

As Baby Boomers, our fears when growing up were such things as the Atomic Bomb, nuclear war and communism. Our grandchildren have much to fear as well. They have inherited a climate crisis. It is also clear that they are the ones who will suffer the economic consequences of the pandemic. It is likely to be much more difficult for them to get the kind of career opportunities they would wish.

If they are fortunate enough to get good employment in a career that is right for them they will likely face higher taxes. We all know that the Government needs to deal with the huge debt created by the pandemic but this is likely to be tackled over very many years using higher taxes than we currently enjoy.

There is another issue they face

Recent research has added a further drag on the ability of Generation Z to build prosperous futures for themselves and their future families.

Whereas real investment returns (i.e. allowing for inflation) from shares since the 1950s have averaged 7.1% a year and even real investment returns from fixed interest investments have averaged 3.6% a year, future returns over the next few decades are projected to be a lot different.

We are moving into a low return world (just look at interest rates and inflation) and whilst inflation is expected to rise we are unlikely to get back to the rates seen during the working lives of the Baby Boomers.

Real returns from shares of 3.0% a year are much more likely than 7.0% over the next decade or two, with next to no growth in the capital values of fixed interest investments.

How can we help our grandchildren?

When they are young we can make use of Junior ISAs. This is a tax free way to save a monthly amount as little as £10 for each grandchild under 18 and living in the UK. They can be either cash or stocks and shares ISAs and the limit for 2020/2021 is £9,000. The end result could be a decent cash sum available when the grandchild is 18.

Apart from putting aside money for them we need to encourage them to start saving early themselves. As soon as they get their first pay packet they need to learn the discipline of putting something aside for the future. This should preferably be in equities (stocks and shares) as they have been shown to produce real returns above inflation over the long term.

Gen Z-ers, as they are known, will have to save more than we did and certainly much more than their parents to have any hope of living comfortably in the last third of their lives. A great many of them will live to be over 100 and remain in good health but are likely to be restricted in their later life choices by lack of income.

To loosely quote renowned financial historian Professor Paul Marsh, currently Emeritus Professor of Finance at London Business School

“What can Gen Z-ers do to mitigate the damage? For starters, they should not calibrate off the past. To have any hope of retiring as comfortably as their parents, they will have to save more. They should adopt the time-honoured (if unexciting) principles of long-term investment, including starting early, diversifying risk and avoiding high management fees. Rather than checking the value of their investments every ten minutes and trading frantically, they should exercise patience and sit out temporary shocks and turbulence. Gen Z needs to go against the grain of what comes naturally to them.”

Education is the key

During my career as a financial adviser I have dealt with large numbers of people in their 40s who were just waking up to the fact that they needed a financial plan for their future.

Many of these have been lucky because they have been helped by good access to high paid jobs, final salary pension schemes, rising worldwide equity values, good interest rates on fixed interest and cash holdings, exceptional property price rises, inherited wealth and State pensions from as early as 60 and 65.

Generation Z may not have such following winds to help them along. We need to encourage them to start planning much earlier. Financial planning in all its aspects continues to be absent from most school curriculums. It is therefore up to us to do what we can to show the younger generations how to move towards prosperity for themselves and their future families.

Arthur Childs

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