Dear son,

I know your life currently revolves around milk and learning to roll over, but hopefully the content of this letter will be of much interest to you in around 21 years’ time - perhaps sooner, but ideally not much later. The world in 2040 will be very different to the one I entered after university in 2006. Not just technology and gadgets I can but dream about but, more importantly, the structure of the population will radically change over the years and this has enormous implications for what your finances will look like.

These changes will challenge assumptions that we once held as immutable truths. The long-term level of taxes, pensions, economic growth and asset returns could all be altered drastically and, I fear, for the worse. But, as you read this, there are things you can do now to help yourself.

At the heart of the transformation is demographics. The changing shape of the population is going to cause a seismic shift in your experience of the world compared with mine, and the life choices you make will determine whether your future will be prosperous or meagre. I hope you have a long and happy life. The complication is that almost everyone else will be living longer.

People are getting older

Your mother and I are so proud to have you, our first child. You may or may not have a sibling but people like us are choosing to have fewer children. Thankfully, better healthcare means lower infant mortality but the greater number of children surviving is more than offset by the falling number of births. Meanwhile, I’ll be in my fifties by 2040 but by then a quarter of those living in high-income countries are expected to be 65 years old or more – healthcare advances mean life expectancies will keep on rising.

Immigration, which can counter the prospect of ageing populations, is trending down as the subject increasingly becomes a political football. Worker mobility, once a reliable way to fill regional worker shortages, is falling as well. Overall, this means the ratio of dependents to workers will rise putting more pressure on those in employment to support the retired generation. This is a big deal son, because relatively fewer workers leads to lower economic growth and that directly affects your investment choices.

Lower returns for a long time

Returns on investments are closely linked to growth, inflation, and interest rates. Stock returns are directly affected by economic growth, and bond cash flows are directly affected by interest rates. In short, to achieve a target retirement sum, you must save more, and for longer, because returns are lower. If you think you can just vote for political parties that enact policies to help your generation, such as raising future pension benefits, then don’t be so sure - an ageing population will leave its mark on politics as well.

The old shall inherit the earth. Or at least they’ll run it.

Older people tend to vote more than younger people, and combined with their growing numbers, they will become an increasingly potent bloc in deciding the outcome of elections. Seniors citizens gravitate to political candidates who pledge to protect their lifestyles, but these policies may not serve your generation well.

Such policies include generous pension benefits and free health care services. This could turn out to be very expensive given retirees are living longer and older people suffer from costly long-term illnesses such as dementia - the fastest growing disease in high income countries.

To cover these costs, governments can resort to a combination of cutting spending on other public services and raising taxes. Both squarely hit your generation: younger, working people. Public debt may also increase to plug holes in the budget, pushing today’s costs in to the future and leaving the next generation to handle it. The state could even raise your generation’s retirement age and reduce your pension benefits. As much as you don’t like it, you may have to grudgingly accept the state reducing your standard of living while at the same time indulging retirees.

Technology to the rescue?

One factor that could potentially reverse falling economic growth and offer new opportunities for you is the adoption of technology. The advent of the internet, big data, robotics, AI and machine learning are breakthroughs that are a boon to productivity in my generation. No doubt that in 2040 there will be a whole host of mind-boggling new technology put to work. But a side effect of this innovation will be lost jobs. The question is whether the productivity gains from new technology and the associated creation of new jobs will be greater than the losses from obsolete jobs. I hope they will be so you can have a greater range of career opportunities available to you.

There are solutions

The world is changing rapidly in innumerable ways that are impossible to keep track of, let alone predict. These demographic trends have the potential to alter the very structure of society. Multiple generations could start living together (you may be stuck with me for longer than you would want). There could be societal upheaval and protests. Debates about how to distribute wealth and income could rage furiously. This is my effort to organise some of the intricacies so you can make more informed decisions about education, training, careers, buying a car or house, savings and investment, and much more.

There are solutions, such as creative investment strategies, combining asset classes including from outside the traditional groups, and embracing both passive and active philosophies. But, you will almost certainly have to save significantly more than I did to reach similar investment goals. I’m sorry that it won’t be easy and it’s certainly not fair. The options in front of you are far from ideal, but not making choices about saving and investment strategies guarantees failure. The sooner you take the difficult decisions the quicker you can be on the path to success.

If it’s any consolation I’m experiencing the same issue regarding the generation before me, who took earlier retirement with remarkably generous benefits. On graduation, I was lumped with a pile of student debt which took years to pay off while the generation before enjoyed free university tuition and student grants. It was also a struggle to get on the housing ladder because not enough homes were being built. Previous generations have a lot to answer for, but at least one thing that won’t change is that we can both take solace from blaming our parents.

Data referenced in this article came from the UN World Population Prospects report, July 2017