Five tips for a dignified retirement
Most of us have assumed that our retirement pension will mean a significant reduction in our purchasing power, although there are still a few who are taking action. We offer you five financial tips to enjoy a decent retirement, which in no case involves taking out a pension plan.
The future of pensions is in the balance. The ageing of the population and longer life expectancy are undermining the precarious balance between income from contributions and pension payments. It is estimated that Social Security closed 2022 with a deficit of almost 5 billion euros. And the hole is getting bigger every day.
The outlook is so bleak that economist Javier Díaz-Giménez warned in October that to balance the system it would be necessary to halve pensions, double contributions and delay retirement to 74.
Lack of preparation
Despite the uncertainty about the future of pensions, a recent survey by the Organisation of Consumers and Users shows that seven out of ten people are not preparing for their retirement. And most of them assume that their income will decrease after retirement.
Two out of five do not do so because of material incapacity: either they do not have enough income to save (20%) or they have other expenses to prioritise (20%). Thirty-five per cent do not prepare for what could almost be considered “irresponsibility”, as they believe their pension will be sufficient, they consider themselves too young, or they are not concerned at all. And 19% claim ignorance, as they do not know how to prepare financially.
Tips for preserving purchasing power
With members of the latter group in mind, here are a few tips on how to improve our retirement:
- The earlier, the better. Those who think they are too young to worry about their retirement are wrong. Compound interest means that starting to save earlier makes a big difference to the amount available for retirement. If we invest the same amount each year and earn a return of 5%, starting at age 20 will allow us to retire with almost twice as much capital as if we start at age 30. Keep in mind that each year’s returns are added to the following year’s capital, so starting earlier multiplies the final results.
- Save as much as you can. The ideal amount depends on your means and your goals. As the OCU survey shows, there is a significant percentage of people who can hardly devote anything to their retirement. If this is not your case, a good starting point would be to invest between 10 and 15% of your income. If you can increase your contribution every year, so much the better.
- No pension funds or almost any investment funds. One study warns that the average yield of pension funds in the Spanish market between 2006 and 2021 (1.83%) was even lower than that of government bonds in the same period (4%). And something similar happened with investment funds, as their average return was 1.91%. The research shows that only 64 of the 562 mutual funds analysed outperformed government bonds.
- Diversify. When it comes to investing, it is always said that it is not good to put all your eggs in one basket. To balance return and risk, you should have a diversified portfolio, which can include stocks, bonds, real estate, gold and even crypto-assets. The idea is not to expose yourself to a single asset class that could collapse and volatilise your savings. And the percentages of each asset will depend on our age and the risk we are willing to take.
- The attractiveness of index funds. Within this diversified portfolio, index funds of the major international stock exchanges should play a special role. This option is simpler, safer and cheaper than playing the stock market, as index funds buy all the shares or bonds in a category or market so that our losses or gains are adjusted to their overall performance. It is worth thinking big because the average return of the IBEX-35 between 2006 and 2021 was 1.35% and that of the S&P500 was 10.7%.
According to the OCU survey, today only one in ten retirees has sources of income other than the public pension, mainly real estate rentals and pension plans. It is therefore not surprising that a good percentage of pensioners regret not having saved more for the future. Their regrets should serve as a warning.
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