At what age should I open a pension plan?
Many people think of this savings product as a decision to make at maturity or at the end of their working life. However, as experts advise, the key is to hire it as soon as possible to make it truly profitable.
98% of Spaniards are “very concerned” about the sustainability of the public pension system. However, most do nothing to remedy it. This is the main conclusion of a new study by Inverco and Front Query, which reveals that, although three out of four Spaniards do save with the objective of complementing their retirement, one third do so sporadically and only two out of ten do It does periodically.
In this way, although a high percentage of Spaniards know that their purchasing power will be significantly reduced when they begin to receive the public pension – the average of pensions in Spain stands at 1,140.71 euros, discover how your pension will be with this calculator – , and that the Bank of Spain itself has warned on several occasions of the difficult sustainability of Social Security due to the aging of the population, pension planning is one of the pending subjects of a large number of people, an urgent mistake solve.
The good news is that we still have time to change things. How? Very simple: ” Starting to save as soon as possible and constantly, internalizing that the savings for this purpose must be periodic,” explains Alberto Vizcaya, a member of the Inverco Pension team.
In other words, taking into account the gradual reduction of public pensions, if you want to enjoy a certain quality of life in the future, the experts consulted agree on the same thing: the sooner you open a pension plan, the better. Why? Because for the private investor the greatest ally is time. That is why it is important not to waste it and bring out your forecasting and saving capacity.
This is a pension plan
In the end, a pension plan functions as an investment fund . Therefore, the sooner we start, the more money we will have contributed and the more time we will have been able to take advantage of compound interest. Just as there is a big difference between investing today or doing it in ten years, the same goes for the pension plan. The sooner you hire, the sooner you can start receiving the benefits of long-term savings.
To understand it better, we will assume that, until you can retire , that is, up to 65 years old today, you will allocate 100 euros per month for a pension plan that, for example, offers a 3% return. Although, if you start very young, experts recommend more aggressive plans with higher returns, we will fix that interest in all cases to see the huge difference that would still exist depending on the age of onset.
- If you start with 20 years you will have a capital of 115,000 euros .
- If you start with 30 years you will have a capital of 75,000 euros.
- If you start with 40 years you will have a capital of 45,000 euros.
- If you start with 50 years you will have a capital of 23,000 euros.
- If you start with 55 years you will have a capital of 14,000 euros.
- If you start with 60 years you will have a capital of 6,500 euros.
With the numbers on the table, the conclusion is even clearer. As in other long-term products, in pension plans it is better to start soon as this way it is possible to establish a greater patrimony without having had to make an excessive economic effort.
We must not forget either that we live longer and better and that we will need more money for a longer time once we are no longer active. In fact, according to the report of the Santalucía Institute, “The challenge of longevity in the 21st century”, life expectancy grows in Spain at a rate of 10 hours every day. Currently, the Spaniards live an average of 82.8 years , a paradigm that places us second in the world (and with a future forecast to reach the first place), and where the savings industry will play a fundamental role .
What pension plan to choose?
If you have already convinced yourself of the enormous advantages of starting to save already for a pension plan, now comes the second part, although no less important. What pension plan do I choose?
To hire the most optimal you will have to take into account the following variables:
Contractor profile: conservative, moderate, aggressive
One of the basic principles that experts recommend is to bet on equities if you have much time to retire and for fixed income, much more conservative, if you have few years left. The financial stages of life are something to take into account in this product, but since there is no penalty in the transfer of pension plans, a fairly recommended option is to start in equities and look for more conservative plans when they remain, for example, five years to retire.
Although to encourage the hiring of these plans, the Government has established a maximum management commission of 1.75% and in the case of the deposit 0.25% you have to look carefully at what your manager will charge you, because in the long term you will not It is the same as charging you 1.25 or 1.75%.
One of the great advantages of this financial product is its important tax advantages in the Income Statement while you are contributing savings to the plan. However, keep in mind that it is equally important to know when to request reimbursement from the plan. If we do not do it in a planned way, we run the risk that half will be left by the Treasury. There are three models to request the rescue of your pension plan: in the form of capital (with a single payment), income (periodic payments) and mixed (combining the previous two). The first option is the one that can harm us the most since it is taxed as work income.
Pension plans are characterized by low liquidity, a detail to take into account if you think you will need money before you even retire. Once hired, the plan can only be rescued in advance in case of serious illness, long-term unemployment or death of the holder. In 2018, the Government also introduced an important novelty: from 2025, contributions and returns generated by plans that are at least 10 years old can be recovered.
Knowing which public pension we will receive at the time of our retirement is essential to plan our savings. Social Security is obliged to inform the workers by letter annually of their estimated pension, although today that ‘orange letter’ has not yet seen the light. It is true that there is a simulator with which an approximate calculation can be made. However, several levels have denounced that it does not offer a real estimate as it does not take into account neither the evolution of inflation nor the maximum ceilings.
Like other financial products, pension plans are affected (and much) by the state of the financial markets. In a scenario of falls like the current one, for example, specialists are committed to mixed fixed income, since it would provide the security of fixed income and a small percentage in equities. It would be the ideal combination to find the balance between security and profitability and that will allow us to add, for example, between 3% and 4% annually.
If despite having this information clear, you do not really know which one is best for you, we recommend you go to a financial advisor who sheds light on this increasingly necessary tool if you do not want to lose purchasing power after so many years of contributions.
In this sense, and although it may seem repetitive, it should be remembered that in pensions it happens as in other savings vehicles: tomorrow is already late. Although precariousness and junk contracts may seem an impediment, it is not so. If we hire a pension plan at 20 or 30 years, nothing will prevent us from enjoying those wonderful years of youth that, at the same time, can allow us an interesting piggy bank for retirement.
Experts already say: saving month by month in long terms works miracles.