How should I save for retirement?

We all know how fortunate we are to live in one of the world’s longest-living countries. This also means that our public pension system will not be able to go on sustaining current benefit levels when the number of pensioners reaches the number of people working. This is why it’s necessary to save while we are active, as a supplement to our public pension. And the earlier we start, the bigger the accumulated balance will be as a result. Among the best retirement saving instruments are our pension plans.

Current situation and tax changes

In recent years, there has been a reduction in the tax advantages associated with individual contributions. We thus need to supplement them with other alternatives that offer tax advantages, such as individual savings products (SIALPS and PIAS), company-sponsored options or group retirement plans.
It’s necessary to save a percentage of one’s salary on a monthly basis and throughout one’s entire working life. One possibility, for example, would be to start saving 5% of one’s salary between the ages of 25 and 45; 10% between 46 and 55; and 15% between 56 and 65. Each of us can, of course, adapt our savings habits to the best option according to our family situation.

Individual pension plans continue to be the best retirement savings products because they are the only individual products that enable you to save for retirement while also lowering your taxable income in the same contribution year. There is also a wide range of plans where everyone can choose the particular plan that best suits their risk profile and needs, while allowing regular contributions and liquidity only when necessary. It’s also very important to start saving for retirement as soon as you can. This principle can be illustrated through an example:

Two brothers save €166 a month for 20 years, but one of them does it from the age of 25 to 44 and the other from 45 to 64. Which one will have built up more retirement capital?

It’s obvious that it will be the one who saved from the age of 25 to 44, but what is surprising is the difference. Taking an average return of 3% per annum, in line with returns in the pension market, the former will save €99,724 (€44,953 more than the latter, who will save €54,771). Therefore, our recommendation is to start saving as soon as you can.

How do lifecycle pension plans work?

They are highly worthwhile products because they automatically adapt to the life stage of each individual. When a person is young and many years away from retirement, experts say it’s best to invest mostly in equities and for fixed income investments to be reserved for the long term. In contrast, in the years closest to retirement one should take a more conservative approach and mainly invest in short-term, fixed-income options.

This is the way lifecycle plans invest. Depending on the number of years left before collecting on the plan, they invest to a greater or lesser degree in equity and in fixed income for a longer or shorter term. And as the years go by, the percentage of equities goes down automatically as does the periods for fixed income investments.