We think of retirement as the reward for a lifetime of work
. It’s time to enjoy some quality free time for your hobbies, spend time with your family or travel.
For this to be the case, a certain degree of planning is necessary. This is where most Spaniards fail. We take it for granted that we will enjoy a golden retirement no matter what. The reality is that it might not be.
If you want to choose what your retirement will be like and not let it be decided for you, there are five mistakes you should avoid. These are the retirement planning mistakes that most Spaniards make. Let’s take a look at them!
Thinking that a state pension will be enough
How far do you think the public pension will go? Spain has one of the highest public pensions in Europe. The pension replacement rate is around 78% according to OECD data and 72% based on European Commission figures.
This figure measures the percentage of your last salary that will be covered by the state pension, on average. The percentage is well above the 58% of Europe and the replacement rate of countries such as the Netherlands or Germany, which have two of the most sustainable pension systems.
For this very reason, the question is not how far the public pension goes, but how far it will go in the future. The debate on the sustainability of the public pension system is not new and is part of the political agenda.
Beyond the certainty of reports doubting its future, if you rely heavily on your state pension, your retirement income will not depend on you, but on how that pension evolves. The solution? Look for a supplement to that public pension that serves as a safety net.
Thinking about retirement when there are only a few years left to go
Delaying saving for retirement is the second most-frequently repeated mistake that results in retirement planning being left too late.
When it comes to saving for the future, the sooner you start, the better. Time is a private saver’s greatest ally.
When is the best time to start saving? With your first salary and if you are not already saving, right now. In this article you can see how to get going in less than 10 minutes.
The difference between starting late and starting early is huge. Imagine you start saving 100 euros a month at the age of 25. When you retire at 65 you will have 48,000 euros in savings alone.
If, in addition, you are able to make those savings profitable, the compound interest will make your money grow exponentially. With a 2% annual return you would have 73,932 euros in the account without having to do anything more than save every year.
Start at 35 years old and you will have 12,000 euros less in savings and also 10 years less in compound interest. The result is that you will have 49,665 euros and you would have missed out on earning 12,267 euros in interest. That’s the power of compound interest when coupled with saving time and investment.
Thinking about your retirement savings in the short term (long term)
How long do you have until retirement? If you have been able to avoid the above mistake to a greater or lesser extent, you will still have about 20 years until retirement.
One of the most common mistakes when planning for retirement is not taking this time horizon into account and investing as if you were doing it in the short term. The result is overly conservative investments when in the long term the focus of the investment should be to get a return, at least for the first few years.
One of the maxims of investing is that there is a direct relationship between the risk you take and the return you can expect to get. The greater the risk, the greater the potential return. If you are too conservative, your profitability will be limited and you will have to contribute more money out of your pocket to achieve your savings goals.
In numbers and using the previous example of a monthly savings of 100 euros, if instead of a 2% return you obtain 3%, after 40 years you would have 93,196 euros, almost 20,000 euros just by putting in the same amount.
And if you go even further? This is what would happen:
|Contributions||48.000 €||48.000 €||48.000 €||48.000 €|
|Interest generated||25.932 €||45.196 €||70.592 €||104.208 €|
|Total||73.932 €||93.196 €||152.208 €||143.760 €|
It is not a question of risking everything, but you must be clear about what you will get in each case. In the end, time reduces the volatility of investments and, in addition, if you have time ahead of you, you will be able to correct any possible mistakes.
Not knowing what you need and underestimating your expenses
One of the typical mistakes when planning for retirement is not being clear about how much money you need to save to enjoy the retirement you dream of.
It is typical to think that your expenses will be more or less the same as they are now or less if, for example, you have already finished paying off the house. The problem is that your lifestyle will not be the same, and neither will your health.
It is true that your house may be paid for and you will spend less on transport if you don’t have to go to work. Instead, you will also have more free time that you may want to invest in travel, and this is not cheap, or in leisure and quality time. Think about what you’re going to want to do with that much free time and figure out the cost of your choice.
Something similar happens with your health and maintenance costs. We tend to think about retirement at 65, but fortunately, once you retire, you’ll keep getting older. It is relatively easy to anticipate what you might spend when you are 65, but knowing this for when you are 85 is a bit trickier. Think that you may need to make home improvements to adapt your home to reduced mobility, for example, or that you may need a caregiver during the day or even at night, or have to pay for a nursing home.
These are all expenses that you should take into account when planning your retirement and figuring out how much money you will really need if you don’t want to rely on government assistance.
Not having a plan that keeps running on its own
The last mistake most people make is the same one that prevents them from saving in the first place: they don’t have a plan and, if they do, it doesn’t keep running on its own.
When your savings or your retirement depend on your willpower and actions that you have to perform every month for your entire life, it’s easy to let it slide at some point and never get going again. One example is the arrival of a child.
The key to avoiding this is to create a system and plan that works on its own. Many retirement products allow you to make regular contributions so that you don’t have to worry about saving or investing every month or every year. Depending on your circumstances, a pension plan, a PPA or a PIAS may be just what you are looking for.