If 50-year-olds and younger people rely on state-provided retirement pensions, they are in for a disappointment. The state-provided old-age pension currently represents approximately 45% of the most recent income (as an employee). In 15 to 20 years, this will actually decline to something around 30%. The current pay-as-you-go system of pension payment is not sustainable in the long run. To reach a certain standard of your income after you retire will therefore also require your own savings. Otherwise your standard of living will see a sharp decline. This topic is therefore a key priority in advanced European economies. This is also demonstrated by the systematic awareness of the general population and the way people treat their income in an economically productive age.
How much we should put aside
People in Slovakia don’t have the necessary information about the level of the old-age pension they should be receiving. Outreach and awareness are missing. The government and its social engineering policies are distorting even the few good rules that would be beneficial for the sickly pension system. As a result, more than 60% of Slovaks in an economically active age do not save for retirement. Among the 30 to 40-year-olds, only one in five actually put money aside for retirement. Still, the most recent statistics on average life expectancy in Europe say that citizens are expected to be on retirement pension for 20 years. This reality forces us to take the retirement pension into our own hands.
Would you like to improve your pension by €500 per month? If you start to save with a well-chosen strategy at the age of 25, putting aside a little less than €30 per month could be enough. At the age of 35, one should save €60 monthly and at the age of 45 it should be as much as €130 every month. Starting one’s retirement savings 10 years before the actual retirement age, i.e. around the age of 55 would force you to put aside as much as €370 from every monthly wage. Every single year you put off the beginning of retirement savings will represent an essential change in the final bill. It is therefore highly recommended to start immediately.
Most Slovaks park their assets in the lowest-performing funds
No discussion is necessary on the so-called 1st pillar of the pension system. It is mandatory, but it will not suffice to provide the current standard of living after retirement. The so-called 2nd pillar currently comprises almost 1.5 million future pensioners. At present, total savings in the 2nd pillar amount to €7.6 billion. Almost 80% of future retirees have their savings in bond funds, 12% in stock funds and 8% in index funds.
This means that by far the largest share of people saving for retirement have their savings in the funds that are the lowest-performing in the long run! This situation was mainly caused by the government, with its incompetent measures affecting the system. Although switching to index funds has been possible since 2012, the reaction of the savers has been rather lukewarm. Still, index funds offer appreciation in the value of savings that exceeds bond funds several times over.
Taking advantage of stock index funds is a decision that should not be put off. Saving for retirement in the long term with a so-called DSS (a pension asset management company) which offers poor results is not the best solution for your future retirement savings. Assets can be adjusted immediately with your asset management company. After suitable changes and tidying up in the second pillar, the valuation of your savings gets to a higher level. Active management of your retirement savings will bring several-fold returns over the years.
Across sporenie+ as the market-leading product
Just under 800 thousand Slovak retirement savers use the so-called third pillar of pension savings. The funds contained therein manages assets amounting to more than €1.9 billion. However, the valuation of deposits in the third pillar is a disappointment rather than a pleasant surprise. The tax relief policies declared by the government do little to sweeten the bitter aftertaste. This is one of the reasons why there are alternative solutions on the market, which offer people as well as companies more while enabling independence from state schemes.
The team in Across offers modern, more affordable and more efficient solutions built on index funds traded exclusively on regulated markets. Another advantage is the exemption of revenues from tax and contributions payment for natural persons.
From the beginning of 2016 until June 2018, the valuation of the most dynamic retirement funds in the third pillar (DDS – additional pension insurance) ranged from 3.87% p. a. (AXA) to 4.06% p. a. (Tatra banka ComfortLifeTB 2040). The strategy of Across sporenie+, is based on index funds and the valuation of its assets reached 8.91% p.a. in the same period of time.
Similar to the second pillar, the future retirees saving money in the third pillar are also very slow to change their approach. On the other hand, you may immediately terminate the sending of your money into the third pillar after agreement with your employer. Saving schemes then need to be reset to achieve maximum effectiveness. Costs for operation need to be reduced to the minimum, just like taxation of profits. It would also be optimal to take advantage of financial products whose revenue is exempt from tax as well as health-insurance contributions. This is one of the ways to ensure the best possible valuation of one’s savings in the long run.