If you haven’t started setting aside money for retirement, you’re not alone. Here, get a solid understanding of the different investment options so you can set yourself up for your golden years.
11 min read
These statements are intended to provide general information and do not constitute investment advice or any other advice on financial services and financial instruments such as stocks and ETFs. These statements also do not constitute an offer to conclude a contract for the purchase or sale of stocks and ETFs. Stocks and ETFs can be subject to high fluctuations in value. A decline in value or a complete loss of the money invested are possible at any time. The values depicted are fictional and for illustrative purposes.Whether you’re well into your career or just getting started, you’ve probably heard how important it is to start saving for retirement. But setting aside money for a long-term goal like that is easier said than done. Many of us haven’t planned what we’re going to have for dinner tonight, much less started setting aside money for our golden years. And yet, once you’ve got your basic expenses covered, anything you can set aside for retirement will pay off down the line. With the right savings strategy and a solid understanding of the different investment options out there, you can set yourself up for success. In this article, we’ll discuss what you need to know about saving for retirement, the different types of pension schemes, and how to stay on track to reach your goals.
Understanding retirement: What is it and how does it work?
Whether you love your job or merely tolerate it, work gives many of us a sense of purpose and accomplishment. But, once you reach a certain age, you likely want to pursue other passions and pursuits. What’s more, you may not be able to do your job as effectively as you’re used to. Enter: retirement — a time to enjoy the fruits of all your labor and enjoy the good things in life. When you retire, you effectively leave the workforce for good. This means that instead of earning a salary, you’ll live off your pension(s) and other savings. The age when people retire varies depending on your job, country of residence, and how much money they have saved. In most places, the official retirement age is when people can start collecting their full public pension. Historically, people could expect to retire in their early sixties, but governments have been progressively raising the retirement age in order to keep their pension systems afloat. In most European countries, the retirement age is between 63 and 67, but it may rise further in the future.
The different types of retirement funds
If you plan to retire, you’ll need to set money aside during your working life. In most countries, you’ll do this by contributing to the public pension fund and/or by investing your money in other subsidized or private pension products. Think of this as saving up to keep paying yourself a salary once you’ve stopped working. Though the options for retirement savings are vast and vary greatly from country to country, they tend to fall into four main categories — each with their own advantages and disadvantages. Let’s take a look.
Public pensions
Public pension schemes are set up, financed, and regulated by the government. These programs are mainly funded by taxes and voluntary contributions. The idea is that you pay into the system for the required amount of years; then, during retirement, you’ll receive a monthly stipend that’s in line with the amount you paid in. Many countries use a so-called “pay-as-you-go” system — meaning the current workers pay for current retirees. For this to function properly, there needs to be enough workers paying into the system to finance the ones in retirement. It’s worth noting that not everyone is required to pay into the public pension scheme. If you’re a freelancer, for example, you may only be entitled to a minimum public pension payout.
Employer-sponsored pension plans
When you work for a company or organization (depending on the size) you may be offered a retirement plan by your employer known as an ‘employee-sponsored pension.’ These plans typically work by deducting a portion of your pre-tax income and depositing it into a retirement account. In some cases, your employer will match a portion of your contribution up to a certain percentage. This allows you to build wealth for retirement without thinking about it too much. Of course, you won’t be able to contribute to this type of account if you’re freelance, and you may or may not get to choose the investments or management structure of the account.
Private pension products
In addition to offering public and employee-based plans, most governments set up private pension products specifically designed to help you save for retirement. For example, you may be able to take advantage of tax-deferred accounts that save you taxes at the time you invest into the account, or when you withdraw your funds in retirement. These types of accounts are particularly advantageous if you’re self-employed.Note that these account types are designed for retirement savings, meaning you’ll likely pay a penalty if you withdraw the funds early. Conditions vary widely from country to country, so they may not be suitable for everyone.
Investments and equities
Another option for growing your wealth for retirement is investing in stocks, bonds, index funds and the like with a standard brokerage account. Unlike pension programs and other financial products, equities aren’t linked specifically to your retirement projections and don’t offer you any tax advantages. Basically, you’ll open a brokerage account, invest your money, and hope for a positive return on your investment over time. When you do decide to pull out the funds, whether it’s in two years or twenty-two years, you’ll be taxed on your investment earnings just like you would on any other type of income. However, the advantage is that, unlike other pension products, your money isn’t locked in and you can retrieve it anytime you need it.One more thing to note: Whatever options you’re interested in, when it comes to taxes and wealth management, it’s always a good idea to consult with a personal financial advisor.
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Why your public pension may not be sufficient for retirement
As we noted above, public pension programs in Europe are struggling to stay afloat — and things aren’t exactly looking positive for the future. Most Europeans used to be able to rely on their public pension payouts to finance the majority of their retirement. This is often no longer the case, and there are several reasons why. The first has to do with demographic shifts in Europe. Birth rates are generally declining, which means that countries are producing fewer workers to fund their pension systems. At the same time, we actually need more workers to keep up with the boom of new pensioners. On top of that, average life expectancy is increasing. The longer people live, the more money they will need to draw on from the public pension. We’ve also seen two decades or so of tremendous economic volatility. The stock market crash of 2008 and its subsequent recession, the upheaval caused by the COVID-19 pandemic, and the continued rise of interest rates have all caused instability for pension schemes. Furthermore, shifts in the labor market — like the rise of the gig economy and automation — have had an impact on tax revenue and social spending. All these factors have led to policy decisions across Europe to raise the retirement age, decrease benefits, and tax the benefits at a higher rate. And although your public pension payout depends on plenty of different factors, it’s likely that you’ll need quite a bit of additional retirement income — like a private pension.
How investing in a private pension can support your retirement goals
Employer-sponsored pensions, private pensions products, and equities can all be powerful ways to set yourself up for retirement. By investing a certain percentage of your income into one of these account types, you can supplement your public pension, stave off the effects of inflation, and grow your wealth. But how do you calculate how much to invest? Here’s how to determine what you could invest and how to get started.
See what you’re on track to earn in retirement
If you’ve been paying into a public or private pension for all or a portion of your working life, you can find out what you’re on track to receive in retirement. Government pensions document your payments each year, and should be able to issue you a statement showing your projected retirement earnings if you keep paying in at your current rate. Likewise, if you’re a freelancer with private retirement savings, or are currently contributing to an employer-sponsored plan, you should be able to calculate your expected returns on your investment. This will give you a rough idea of how much you’ll have available to you in retirement.Keep in mind that no one knows how public pensions will change in the coming years, and investments go up and down depending on market fluctuations, so take the projections with a grain of salt.
Use a retirement calculator
Now that you know your projected retirement payout, you can figure out how much money you’ll need on top of that to have a comfortable retirement. While this is hard to judge, most experts agree that aiming to have 70-80% of what you earn today is a good approach. The best way to get an idea of what you might need to save is to use an online calculator (like this one from Nerd Wallet). These tools allow you to input your information (including your current age, projected retirement age, life expectancy, inflation rate, and your projected annual salary increase) and predict what you may need to invest monthly to reach your goals. These calculators offer a sample based on historical returns, so you can imagine what you may get out of your investment after a certain period of time — just remember that nothing is guaranteed.
Develop an investment plan
Once you have a general idea of what your retirement income should be, you can make a plan for how to get there. Though there’s no one-size-fits-all approach, experts recommend setting 10-15% of your pre-tax income aside. So, take a look at your budget and see what your salary is, what you spend, and what you have left over each month. This will allow you to come up with a realistic contribution based on the figures you got in the previous steps. And when it comes to long-term investing, this can add up! According to Investopedia, setting aside just €500 a month from the age of 30 would make you a millionaire by the time you retire. You should take this advice with a grain of salt, of course, because historical trends aren’t an indication of future returns. However, it’s a good road map for thinking about what your money can feasibly do if you invest it over the long term. Once you know how much to set aside each month, you’ll have to figure out how to invest your money in a diversified way. Ideally, retirement plans include a mixture of pension revenue streams, and a diversified array of assets to help you weather any economic volatility. Taking advantage of your country’s tax-deferred pension products and public subsidies is often a great bet. After you’ve maxed out your savings in these types of accounts, having a robust saving and investment strategy in equities could increase your resilience over the long term.
Be disciplined — and realistic
One of the hardest things about planning for the future is that it takes discipline. Although many of us would rather have a new pair of shoes than save money for retirement, your future self will likely thank you. If you’re starting in your 20s or 30s, you’ve got years to watch your investments grow. So, once you’ve developed a savings plan, do your best to stay on track, and make adjustments when circumstances allow. For example, if you leave your salaried job to embark on a career as a freelancer, you’ll likely need to invest more in a private pension if you don’t contribute the same amount to the public scheme. Conversely, if your salary increases or decreases, adjust your contribution amounts accordingly so that you’re sticking with that 10-15%. Finally, remember that no retirement plan is foolproof, and all pension schemes entail some level of risk. Your best bet is to have a diversified set of pension schemes that you can fall back on, and to have some savings to fall back on if you need them in a pinch. If you need support, our savings articles can help you craft a solid saving and budgeting plan to fit your lifestyle. Saving at N26Once you’ve created a financial safety net with an emergency fund, you can start saving for more long-term financial goals. Looking for an account you can use daily to help you keep on track? Then our bank accounts could be the perfect match for you. With our Spaces feature that allows you to create several saving-specific sub-accounts, and Insights that categorize your spending, staying in control of your financial health has never been easier.
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