We all know that we are living longer, the increase in average life expectancy in developed societies is a reality, and undoubtedly people have increased their longevity. It is currently not unrealistic to expect your retirement to last 20 to 30 years. The average life expectancy in Portugal is 80.72 years at birth and 19.35 years old to 65 years old, according to recent data from INE.
Living longer requires more planning
Living longer naturally brings positive aspects, however, it simultaneously creates a set of concerns, namely the need for effective retirement planning, which has become a central theme with a view to their future well-being. Multiple studies in the European Union reveal that the majority of the population in the European bloc not confident of having enough for a comfortable makeover. But whether or not you are prepared, you will have to retire in the future. This means that You will need a retirement plan with a view to constituting a sufficient nest egg to ensure that you maintain your quality of life during your “golden years”. , unfortunately, this premise today no longer seems to be valid, so be proactive and don’t be dependent on Social Security. Also read: Should I do a PPR?
Don’t depend on anything or anyone in the renovation
As a general rule, you should point out that the amount that will be paid by Social Security represents between 20% and 40% of your future needs, the remainder must be complemented with your savings, ie between 60% and 80%. Don’t be dependent on third parties either, one of the biggest “legacy” you can leave your family in the future is to achieve your financial freedom, and relieve her of the responsibility of having to take care of herself during her “golden years”. Finally, being financially prepared for the future can allow you to retire without worries and focus on the things you love to do. So we present three fundamental concepts for you to build an effective retirement planning:
1. “Put your money to work and make money with your money”
This is the concept underlying the capitalization of earnings. When the money you earn from investments is reinvested, you have the opportunity to accumulate even more. It’s like saying “put your money to work for you”. And how can you do this? Do you have interest-earning savings? Use this money that is paid to you periodically to reinforce your savings. Instead of receiving interest, add this amount to the amount you have invested, increasing the capital on which interest is being paid. Imagine that you have 1,000 euros to invest and that you are betting on a product that gives you 5% per year. If you keep the amount generated by the interest (50 euros per year) every year, you will reach the end of 20 years with 2,000 euros. This is based on the assumption that there is no further reinforcement during this period. If you add the interest money to your capital every year, you will end the same period with more than 2,600 euros. And this without doing anything other than leaving the interest that you have been earning over the years in that product. Of course, if you make periodic reinforcements to your savings, the final value will be much higher. Also read: Is there an “ideal” age to start investing in a PPR?
2. Start saving now!
The sooner you start, the longer your money will have the opportunity to capitalize.. See the following example, suppose you are 35 years old and have an annual salary of 30,000 euros. Let’s imagine that you get 4% annual raises and that you plan to retire within 30 years. Of the 30,000 euros he receives annually, he puts 4% (1,200 euros) into a retirement plan every year, with an annual return of 8%. If you start investing today, you will have 220,944 euros when you retire. If you only decide to start investing in 5 years, you will have 164,878 euros (assuming the same retirement date, salary, raises, savings rate and plan return). for his retirement five years later will make him “save” 6,000 euros (1,200 euros per year) and will slim your savings by more than 56,000 euros. The accounts clearly show the importance of starting to save as soon as possible.
3. Take advantage of the tax advantages
By investing in a retirement savings plan, you can also enjoy tax benefits. There are tax benefits at entry, through which you can benefit from a deduction from the collection in the IRS of 20% of the amounts applied per year, with defined limits. Before deciding to take advantage of these benefits, you must first analyze whether it is worth declaring the PPR in the IRS, because it will depend on the purpose of your savings. Then there is still a taxation that can be beneficial. Income from financial investments is usually taxed at 28%, in the case of PPR the taxation may be only 8%, depending on compliance with certain rules. To understand which taxes you may be subject to, confirm the tax benefits related to the PPR. In addition, if you invest in a PPR with interest capitalization, you can still obtain more benefits of income capitalization power due to tax advantages. Your PPR has the potential to grow faster because the money you would have paid in taxes on your earnings each year remains in the retirement savings plan and can generate additional returns.As a final note, however, remember that while capitalization of income and tax advantages can have a long-term impact, there may be periods when your money will not growand even in those moments, you must maintain focus and discipline, continuing to save for your retirement. Don’t waste time and start saving today! Luís Pinto has a degree in Management from ISEG and is finishing his Masters in Finance thesis at Nova School of Business & Economics. In addition to financial markets and investments, he has a great passion for sport, having been a federated futsal athlete for 12 years. In February 2022, he began his duties as an Investment Analyst at Dolat Capital, currently serving as an Associate Investment Analyst.