Worker or retiree, pension concerns us all whether it is to accumulate a pension capital, or to receive a retirement income out of this capital. It is a long-term activity spanning over 60 years and consisting of two phases: accumulation and distribution. Saving early and frequently through performant and tax-efficient investment vehicles is necessary to overcome the shortcomings of the statutory pension and the traditional savings account. Whatever your situation, running a simulation with our dedicated pension planning tool is the best way to start.
Pension planning consists of accumulating enough money during your working life to generate an sufficient income to maintain your lifestyle after retirement. It is thus made of two phases: accumulation before retirement and distribution after retirement.
Successful planning requires a clear goal. Start by defining how much you will need each month to live comfortably during retirement.
Contrary to popular belief, the standard of living as retiree is not low. Indeed, free time offers new spending opportunities, children and grandchildren just wait to be spoiled while age takes its toll on your health care budget. In that perspective, expect the same level of expenditure after retirement as during your working life.
Many Belgians rely solely on their statutory pension (i.e. legal or social security pension), the payment of which is based on a fragile system where each worker contributes, via his social contributions, to the pension of retirees. Currently, the statutory pension amounts to an average of 1.600€ gross per month for a civil servant, 1.100€ for an employee and 900€ for a self-employed.
These amounts, once taxed, are insufficient to maintain your standard of living as a retiree. If we add to this the unfavorable evolution of the age pyramid which puts the system in danger, it seems prudent to save yourself without relying too much on your statutory pension.
A full working career ranges from 40 to 45 years until the statutory pension at 67. This period should be used to save money and build up your pension capital. The success of this phase lies in putting your money "at work" and investing it to produce a recurring return to benefit from the compound interest effect.
Too many people still wake up around 45 and, realizing that retirement is approaching, try to catch up. Unfortunately, the capital to accumulate is not small and the gap difficult to bridge. While it may seem superfluous to set money aside early in your career, those years are crucial to reaching your goal because every euro invested at age 27 represents 10€ at the pension through the accumulation of interest. In other words, start early!
Once in retirement, you can devote yourself fully to your leisure activities. As life expectancy in Belgium is 85 years, you need to have accumulated enough and assess meticulously the maximum amount of cash you can withdraw each month from your retirement capital to ensure that you will have enough cash until your passing.
During this phase, you might be tempted to take no risks and gradually erode your capital. Here again, the success of your planning will depend directly on the return on your investments. By investing your capital wisely, you can slow down its erosion, or even allow it to continue to grow.
Great news! It is possible and reasonable to generate a supplementary retirement income of 5.000€ net per month from your 67th birthday. To do so, you will need to have accumulated 800.000€ at retirement. It may seem like a lot, but by investing 5.000€ per year for 40 years, and investing it smartly, you will easily reach this amount. This supposes a well-calculated risk-taking investment allowing to generate nearly 6% of return per year on average.
This is just one particular example; each situation is unique. Whether you want to determine how much to set aside for retirement or how much to withdraw from your capital without losing it all too soon, our simulation tool is here to help you.
It is not a good idea to keep your savings in a bank account with a tiny interest rate. Indeed, in the absence of return, the capital that you will have accumulated after 40 years by setting aside 5.000€ each year will only be 200.000€, which is 4 times less than in the scenario above. By spending 5.000€ per month as mentioned above, you will be bankrupt by the time you hit 71 and will have to put up with your statutory pension for the rest of your life.
One of the key success factors to pension planning is the choice of investment. It must be efficient to maximize capital growth, diversified to reduce risk, rational to ignore emotions, and inexpensive so as not to preserve your return.
We recommend investing in a portfolio of trackers - index funds. This passive strategy is based on a financial fact: no one beats the market over such a long time horizon. In addition to being efficient and reducing costs, this approach does not require you to be a seasoned trader and to monitor the market continuously. It is therefore ideally suited to the investor who wants to devote his time to leisure and family rather than to daily investment matters.
Risk taking is another key part of pension planning. The proportion of riskier assets in your portfolio should change depending on the phase of your planning.
The further away the pension, the more relevant it is to invest in riskier assets, such as a global equity tracker. In fact, your investment horizon is very long, and you can easily withstand temporary declines to achieve better long-term returns.
As you approach retirement, from age 47, it is recommended to gradually increase the proportion of safer assets by investing in a European government bond tracker, to preserve your capital and guarantee a stable retirement income at pension.
To encourage the constitution of a supplementary pension, the government offers significant tax breaks if these investments are made through certain vehicles dedicated to the pension such as the company individual pension account (CIPA), personal individual pension account (PIPA) or the free pension for self-employed (FPS). A good pension plan will ensure that all these tax niches are exploited optimally.
Inflation is the depreciation of purchasing power that occurs when the prices of goods and services increase over time. With inflation at 2% per year, 5.000€ today will only really be worth 2.500€ in 40 years. You must therefore consider the gradual increase in your expenses and compensate for this by increasing savings at the rate of inflation.
Your pension plan must at least ensure that you have sufficient capital to cover your financial needs until the end of your life. However, most parents wish to pass part of their wealth to their heirs. This inheritance ambition can be part of a pension plan. It involves either saving more when you are young or reducing your retirement income.
Each person's situation is unique and only a personalized simulation will allow you to set up the plan that suits you best, whether you are looking to receive an retirement income on your capital as retiree or you want to grow your savings for retirement.
To help you, easyvest has created a pension plan simulator. You start by answering a few questions and get a plan that you can refine subsequently by playing with the parameters. If you feel the need, our advisors are available to help you optimize your plan by phone or chat.
Note: This article was written when Easyvest was authorized and regulated by the FSMA as an agent in banking and investment services.