…Many people wonder what their future will be like after they retire. On the one hand, retirement is a time for you to enjoy after years of work. On the other hand, it is normal to have doubts about what this new life will be like and the financial resources needed to live it to the fullest.
This is where doubts arise, such as whether a pension from the government will be sufficient or whether it is necessary to supplement the state pension with some additional income. The problem is that many Spaniards face this uncertainty without really knowing what to do and letting time pass without planning.
These are the steps to take to avoid this mistake.
Will it be necessary to top up your state pension?
Thinking that your state pension will be enough is one of the five most common mistakes when planning for retirement. And this is not a shortcoming related to the amount of the benefit, but rather to not knowing the true numbers of your retirement.
In other words, not knowing how much money you will need to retire. It is very typical to dream of a retirement full of travel and fun, but without having even a rough idea of how much it might cost from a financial point of view or whether the state pension will allow you to afford it.
For this reason, the first thing to do is to figure out how much the retirement you want will cost, and how much you can expect to receive from your state pension. Remember, however, that the way the pension is calculated and the amount itself may change over time.
This information will help you to know whether you need to supplement your state pension and by how much. For example:
Now you earn 2,500 euros a month.
When you retire, at the very least, you want to maintain your standard of living, although you would also like to travel. You do some calculations and estimate that you will need 3,000 euros a month or 36,000 euros per year.
You estimate that the state retirement pension will be around 1,750 euros.
Results: you need an additional 1,250 euros per month to top up your state pension.
Now we have to see how to get that amount.
Plan: save and invest
How to top up your state retirement pension? The simplest and also the most traditional way is with savings and investment.
In other words, spend less than you earn and invest part of that money. The best method for saving effortlessly is to set aside a percentage of your income at the beginning of the month and do this automatically through pre-savings. This way you will be saving every month of your life at a stroke.
In addition to saving, it is also necessary to invest that money for two reasons.
The first has its own name: inflation. Inflation is the increase in prices over time and it marks the increase in the cost of living. Its effect on your savings is very simple: they will lose value over time.
To make this easier to understand, if you used to need one euro to pay for a coffee and now you need 1.2 euros, your money has progressively less value. The nominal value of that euro is the same, but its real value is less because you can no longer get a coffee with it. In other words, you need more money to do the same thing or maintain your standard of living.
The way for your savings to maintain their real value and not just their nominal value is to invest them to obtain a return that is at least equal to inflation, although ideally it should be higher.
The second reason to invest is that investing is an accelerator for achieving your goals. Thanks to compound interest and the return you get on your capital, your money will grow faster and, therefore, you will have to make less effort to collect the amount you need to retire.
Here you can see the difference between saving 250 euros a month and investing that same money at a constant interest of 7%: