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There are few certainties in the public pension system, and despite the fact that the government is drafting a reform to ensure the system's viability, the only certainty, according to experts, is that pensions would be less generous in the medium future. The average pension in October was $1,200.
Faced with this reduction, the worker who does not want to lose buying power in retirement must carefully plan his retirement. To do so, the first step is to determine the type of withdrawal wanted and the amount of money required to do it. Then you must create a financial strategy that is unique to each saver and avoid the five most common mistakes made while saving for retirement.
1. Have faith that the government pension will meet all of your requirements!
The first error many employees make is believing that their state pension would be sufficient to continue the lifestyle they have enjoyed during their working lives. Currently, the replacement rate - the proportion of a worker's pay that he receives when he retires - is roughly 83 percent on average in United States, 20 percentage points more than the OECD average, which experts predict will be decreased in the long future.
Add to this the fact that life expectancy in the US is rising, presently at 83 years old and rising at a rate of 3 to 4 months per year, and future retirees will have to maintain themselves for a longer period of time with the money from their pension. As a result, "believing that the public retirement pension will be adequate to preserve the purchasing power we had before retiring is a mistake," according to Isabel Casares, general secretary of the Organization of Pension Consultants.
He believes it is "critical that employees anticipate their future demands and assess what savings are required to amass in the long run to preserve quality of living in the stage when less money is produced." In 2021, the government intends to boost pensions by 0.9 percent. To carry out this planning, residents must first determine the amount of their future pensions, which Social Security provides through a simulation software.
And, while "occasionally these simulations do not react to reality, and especially more so with so many years ahead," according to EFPA sources, they may be a useful reference for planning a long-term investment strategy.
2. Delay saving
Another typical blunder is starting to save too late. Experts advise starting as soon as you earn your first paycheck, because systematic savings will allow you to collect enough final money to supplement your state pension. Saving should begin "the minute we begin working and obtain money, so that they have time to complement the public pension. The longer we put off saving, the less return they will receive." This is how Isabel Casares views it.
Saving early has two advantages: it involves less work because little amounts are sufficient, and it is more productive because the rewards generate further interest. "Workers must recognise that their retirement will be different from their parents', and delaying the start of retirement savings would only make it more difficult to accomplish the objective," says Rafael Villanueva, retirement manager at Willis Towers Watson Spain.
3. Not making regular savings
When a worker realizes he needs to make final savings and selects a product to do so, he may make the error of saving seldom. This is common when people choose a pension plan and focus their payments in the latter quarter of the year to take advantage of tax breaks and deduct from their personal income tax base.
It is best to make regular contributions, such as once a month. According to Mapfre sources, this has two benefits: "the worker is committed to saving and considers it a fixed expense such as the mortgage, car, or gym bill," and "by contributing several times, the value of the acquisition is diversified," that is, "he does not buy at one security but at several and this exposes him to less volatility."
Rafael Villanueva, believes that "Small savings efforts have astonishing rewards over time. It is sometimes more vital to remain consistent with tiny sums than it is to make erratic, albeit larger, donations." Expert’s advocate saving between 7% and 10% of one's monthly salary. Others argue that an acceptable aim is 15% of gross yearly wage if you begin saving at the age of 25; 18% if you begin at the age of 30; and 23% if you begin at the age of 35.
According to Singular Bank sources, "the math is clear: the sooner you start, the less effort you'll have."
4. Do not take any chances with your investment!
If you start saving early, the time horizon of the investment is quite lengthy, thus the saver can afford to take much more risk since he can recover his losses in the long run. According to EFPA sources, young savers can invest in pension plans with a greater percentage of stocks to achieve superior long-term returns and gradually shift their portfolio to a more conservative allocation as retirement approaches.
According to the same sources, "private investors must grasp that the only alternative to make juicy returns- which means the admission of higher risk," while interest rates are low and protracted. The trick is to adjust the degree of risk at each period of life: take greater risks when you are young and minimise your exposure as you approach retirement.
5. Not periodically reviewing savings
Many people who participate in pension plans just contribute to the plan and do not track the outcome of their investment or the growth of its profitability. To fix this issue, it is critical to examine the information that the company with which the plan was engaged delivers every three months, which includes complete information about it.
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