Close your eyes for a moment. Imagine your life in 20 years. How do you see yourself? Surely you would like to be calm, enjoying life surrounded by your loved ones. In your home, comfortable, healthy, safe and worry-free. You would like to live that moment, right? Well, maybe you have to start preparing it right now.
Planning for retirement is a very important issue, especially when you are over 55. You may still feel at your best professionally and personally, and retirement may still seem far away, but making a financial plan for the future is crucial.
And that is something that we Spaniards do regularly: according to the III Pan-European Pension Survey 2023, prepared by Insurance Europe, the European Federation of Insurers, 51% of Spaniards claim to not be saving for their retirement, which is 11 points more than the European average. The number does not improve much as we get older: among those over 50, the percentage is 47%.
And this is problematic, because savings is the most important ingredient when planning the money we will have once we retire. “When evaluating whether we are well prepared to face our retirement, saving is the key,” says Carlos Santiso, economist, investment fund manager and educational director of the online stock market school, VIBE.
“But it is not the only thing,” the expert clarifies. “There are other factors that must be considered when calculating our future financial needs, especially how and where we invest those savings and the returns we can expect them to bring us.”
For his part, Luis Martín, also an economist and partner-founder of the legal and economic advisory firm Abencys, points out that, in addition to being more or less clear about the income or savings that we will have once retired, it is necessary to determine what expenses we will be forced to To make. “Throughout our retirement we will have some recurring expenses and others that may arise unexpectedly, such as health emergencies. If we have a second home, for example, it will have maintenance costs. But perhaps the most important factor is what standard of living we will want to live and how much money we will need to sustain it.”
“Will we be able to continue spending the same amount as we do now when we retire?” asks Santiso, focusing on this last aspect. It is a matter of preferences but also of life cycles. “It is possible that, as the years go by, our lifestyle will change: expenses related to leisure will reduce, particularly leisure that involves intense physical activity – such as traveling or playing sports. On the other hand, expenses associated with care and health will increase for the same reason.”
Both experts agree that the possibilities when investing are almost infinite and depend greatly on the amounts saved and the specific situation of each person. However, without pointing out specific assets, they give us some keys to decide where to put our money in the years before our retirement and beyond.
A key factor for Santiso is to take into account that, at this stage of our life, there may be the possibility that we will have to get rid of our assets to cover personal or family needs that arise. “Therefore, our investments should be, in general, low volatility so as not to find ourselves in trouble if the time comes to make use of our assets.” The more volatility, the greater the risk that at the specific moment we have to redeem the invested money, it will be going through a period of low profitability, which would cause us to lose money.
“Age is decisive in this aspect,” he points out. “The closer we are to retirement, the less volatility our assets should have and the further away we are, the more we can afford that volatility.” In short, if we start preparing for our retirement very early, we can be a little more daring in our investments and expose ourselves more to variable income.
When we are young, we should take advantage of the higher returns that volatile and illiquid assets usually offer, but as we approach retirement, we will have to prioritize preserving capital and reducing portfolio risk by incorporating quality fixed income and low duration.
Finally, according to our experts, it is not a bad idea to have gold or other real assets to protect ourselves from unlikely but very disruptive scenarios, such as a monetary crisis. “Real estate investments, rental properties, are those that provide recurring income with less risk,” says Martín. “For a person who is retired or about to do so, it is very interesting to have income from this type of investments that helps us cover our day-to-day expenses.”
It is also true that many people also want to leave an economic legacy to their descendants, as indicated by the fact that during the year 2021, 723,642 wills were made, according to data from the General Council of Notaries. “If we are thinking about the inheritance of our children or grandchildren,” Santiso points out, “it is not unreasonable to assume a little more risk in our portfolio than would be logical if we were thinking only about our well-being.”
Although it is sometimes a little complicated to understand, inflation is one of the most important problems when it comes to saving because it reduces the purchasing power of money over time. When prices rise we can buy fewer products and services with the same amount of money. If we talk about savings for our retirement, which are long-term, the impact can be very relevant.
To understand it better, let's give an example: let's imagine that we have 1,000 euros saved in a bank account that does not generate interest, and that the inflation rate is 3% per year —remember that in 2022 the Consumer Price Index increased by 8, 4%-. In one year, with those 1,000 euros saved, you can only buy the equivalent of 970 euros in goods and services. In the case of suffering sustained inflation over time, the effect on our savings can be very important and harm us very seriously.
The only way to combat this effect is to invest our money in financial products that offer returns that equal or exceed the inflation rate, at least in the long term. “Given that inflation reduces our purchasing power year after year, if we do not combat it through investment, the results at the time of retirement can be catastrophic,” Martín warns. "Although in the current rate context it is possible to beat inflation with very little risk, it is not ruled out that we return to an environment of very low rates and financial repression against savers, which would force us to take more risks to avoid suffering the “negative effects of rising prices.”
Taxes also play an important role in retirement planning, as they can significantly affect the income available during that time of our lives and the effectiveness of our savings and investment strategies.
Depending on the investment products we choose, we will be required to pay some taxes or others. “Pension plans allow us to postpone the payment of taxes, since they are paid when the money we have invested in them is redeemed,” explains Santiso. “This allows us to have a larger budget to continue investing and thus maximize profitability.”
The same applies to accumulation investment funds, which have the same tax advantage: we do not pay taxes until we sell our shares. “The reduction of the tax impact depends on the assets you have,” Martín clarifies, “income from capital and real estate returns are currently taxed at 23%. And, for example, those over 65 years of age are not required to pay taxes if they obtain profits from the sale of their primary home.”
It is in these tax issues, due to their complexity and the frequent changes in legislation, that it is most useful to have an expert advisor who can tell us what is best for us depending on our particular case.
Another decision that is usually left for the last years of our professional career is choosing the age at which we will retire. The experts consulted point out three fundamental aspects to take into account. The first would be the most obvious: the greater our assets, the easier it will be for us to meet the expenses we will have during our old age, so we will be able to retire earlier.
Secondly, we will have to take into account the amount we will receive as a public pension, although this is difficult to estimate, especially if there are still a few years before we start collecting it. “The most reasonable thing is to assume that, in real terms, we will receive a lower pension than our parents,” says Santiso.
Finally, we will have to consider what kind of life we want to lead after retiring. The better we want to live, the later we can do it. Here, obviously, we must balance the amount of money we want to have and our physical capacity to enjoy it. “It will be of little use to work and save until the age of 75 with the idea of spending our retirement traveling the world, if by then our physical condition is not going to allow us to make those types of plans. You have to be realistic,” explains Martín.
A problem that usually affects people who have not begun to prepare for their retirement until late in their working life is that they suddenly feel the need to do so and this can lead them to make serious mistakes that can greatly hinder their future. economic.
It is important, according to experts, not to make the mistake of choosing to take on more risk than we can actually afford in the hope of “hitting the big time” and amassing a large amount of wealth in a short time. If the investor takes on more risk than he can tolerate, he will end up making disastrous decisions for his portfolio.
The most appropriate thing in these cases is either to delay the retirement age, or to accept reality and make sensible decisions, adjusting our expectations of future expenses downwards.
Finally, although it is not always strictly necessary, both specialists point out the importance of having good training in wealth management or, where appropriate, of having the help of a financial advisor to help us plan our retirement.
"Any mistake along the way can be decisive and significantly affect our future quality of life. Good advice will be key, as it will help us organize our ideas and make the right decisions to cover our needs, improve our income and increase , if applicable, the value of our heritage,” concludes Martín.
