Thinking about your golden years when you've only just begun working? When you're young and busy building a life, there are so many things on your mind other than preparing for retirement! Still, even if it sometimes feels premature, planning for retirement is one of the best investments you'll ever make for a comfortable future. And the sooner you start, the better. But where should you begin as a young professional?
Why save early for your golden years?
Belgium's pension system works on a contributions-financed system: the contributions from today's working people fund the pensions of today's retirees. However, as life expectancy increases the population is ageing and there are proportionally fewer and fewer people working people to fund pensions. To overcome this challenge, many countries have reformed their systems, generally leading to higher contributions, older retirement ages or even cuts to pensions.
That makes planning for retirement even more important, especially to:
- Limit and spread out the amount you need to save: by starting early, you can save gradually over the long term. For example, to hit €40,000 in savings by retirement with a 2% return, it's easier to invest €55 per month for 40 years than €300 per month for 10 years.
- Diversify your investments and include a reasonable dose of risk over the long term. Steadily investing a portion of your savings in the stock market often proves more profitable in the long run than sticking to risk-free solutions alone;
- Keep your expenses down once you retire by owning your own home outright to save on housing costs. Here again, it is better to invest in real estate as soon as possible to pay off the mortgage before retiring.
Your income will inevitably drop once you retire and a pension alone is often not enough to maintain a decent standard of living. Moreover, it's hard to envisage what the pension system will be like in 30 or 40 years. Fortunately, there are savings schemes to boost your pension. This is what's called funded retirement: generating an additional income to supplement your contributions-financed pension. Let's take a look at the options.
4 investments to keep in mind to prepare for retirement now
# The Retirement Savings Plan (available in France)
As its name suggests, this scheme is designed to provide a supplementary pension. With a PER, you choose to invest in different vehicles, with or without guaranteed capital, and therefore with different levels of return depending on your investment strategy. This sort of investment is available from the traditional players: banks, insurance companies, pension funds or mutual insurance companies. The PER offers attractive tax breaks because your payments into it each year can be deducted from taxable income. This is ideal if you are in the highest marginal tax brackets and can make large contributions to reduce your income tax.
# Real estate investment
Buying your own home so you don't have to pay rent when you retire or investing in a rental property to supplement your income can be a good strategy. It goes without saying that the ideal scenario is to buy a property while you're working and finish paying off the mortgage before retirement.
# Investing in the stock exchange
Despite its bad reputation (lack of transparency, speculation, etc.), the stock market offers good returns provided you invest over the long term to smooth our market fluctuations. Moreover, to make your stock exchange investments more worthwhile, Birdee can offer a customised securities account where you choose the investment vehicles (ethical, sustainable and responsible, sector-based, etc.) so you can benefit from the financial markets in complete transparency.
# Life insurance
This is likely one of the best retirement investments:
- You choose the level of risk you want for your portfolio by balancing the proportion of euro funds (guaranteed capital but low return) and unit-linked products (risky but with a higher potential return);
- You can revisit the balance as you get older to reduce the risk as retirement approaches;
- These products offer advantageous tax breaks after 8 years of ownership and life insurance is not subject to inheritance tax up to €152,500;
- Finally, when retirement arrives you have two options: making regular withdrawals or opting to withdraw the capital as an annuity up to a pre-defined point in time (expiry, death of the policy holder, full redemption).
Ultimately, young people can prepare for retirement in many ways, and the sooner you start the better. Especially since investing early, even on a limited budget, can make a big difference in the long run! With Birdee, you can start investing from €50, simply and directly online, based on your interests and all for a low fee.