One may think that it is way to early to think about the retirement when you’re young, because it is ages away and there are more important things to do. But is it the right way to think?
Imagine there is John, who has been working as an employee since he was 20 and has been making contributions to all three pension pillarsevery month. As his retirement approaches, he has more than 40 years of insurance period and hundreds of thousands of euros in pension capital. While Peter has been working unofficially or receiving envelope wages for all his life and is facing retirement with just 15 years of insurance period and some tens of thousands in pension capital. Which one of them you would want to be when it is time to account your pension amount?
In this article, we’ll discuss, is it really worth neglecting the pension arrangements in younger age.
There is no defined age, from which one should start making pension savings, however the sooner you start, the more you’ll save up. Every month, 6% of your taxable income go to the second pillar pension. The higher is your income, the higher are the contributions to the pension capital. However, the amount of the contributions is not the only factor affecting your pension savings. Of importance is also that this money is invested and earning interest in the second pillar pension plan, since the earned interest is added to the capital and is earning interest again. Therefore, the sooner you start making contributions that earn your interest, the more chance there will be for your money to earn you more money. It is like a snowball – the longer it rolls, the bigger it gets.
2. You can choose pension plans with higher return
Younger people can afford to choose between the active plans, which invest 50% to 100% of the pension capital in stock. Such plans usually have higher potential return that can help you save up more capital for your retirement, yet keep in mind that the active plans also have a higher risk margin. But if you have dozens of years to live till your retirement, you can take that risk, because the fluctuations of the investment value are likely to smooth out, and the higher return of these plans in the long-term may help you save up more. If you do not choose your second pillar pension plan yourself, the choice will be made for you by the State Social Insurance Agency, adding your pension capital to any plan by random choice, which is not always the most favorable solution, because the return of various pension plans may differ significantly in the long-term perspective.
3. You have more freedom in your financial choices
Young people usually do not have large financial obligations and families to provide for, so they have more freedom in their financial choices, for example, to put a way a part of their income into the pension savings. Even if you do not have taxable income and therefore the contributions to the first and second pillar pension plans are not being made, you can start saving up in the third pillar pension plan, because joining one and choosing the regularity and amounts of contributions is at your discretion, it is your free choice.
Safe to say no one wants to spend their retirement years relying only on the minimum pension amount provided by the state. But if the savings had not been made, there may be no other options. To avoid that, see if you are not making any of 9 mistakes in forming your pension savings.
