When Should You Start Planning for Retirement?
“The question isn’t at what age I want to retire, it’s at what income.” George Foreman, entrepreneur and former boxer.
When you’re in your teens and 20s, retirement seems a long way ahead. You spend your money on clothes, socializing, and having fun. You may also have a student loan to pay off and be saving up to buy a house or car.
In your 30s and 40s, you’ll probably have a lot of financial commitments, such as a mortgage, a car loan and insurance. You may also have children to support. You may feel as if you have little or no money left over to put towards your retirement.
All too soon, you’re in your 50s and you realize that you’ve haven’t yet saved enough for your retirement. You’ll have to save a large proportion of your current income if you’re to fund the retirement you’ve always dreamed of. You wish you’d saved more money when you were younger.
So, when is the best time to start planning for retirement?
Give Your Money Time to Grow
The sooner you start saving, the longer you give your money to grow. Compound interest means that the money you leave in your pension pot will continue to grow year on year, because you’ll receive interest on previous years’ interest, as well as on the principal.
So, if you start saving for your retirement in your early 20s, investing a few thousand a year for a decade, and you then stop saving altogether because of personal circumstances and/or other financial commitments, the money you’ve saved will continue to grow year-on-year for the next 30+ years until you retire.
By contrast, if you wait until your mid-thirties before starting to save for your retirement, you may build up a smaller pot of savings, even if you save several thousand a year for the next 30 years.¹ This is because there is less time for your investment to grow.
How Much Money Will You Need During Retirement?
The amount of money you’ll need in retirement will depend on your personal circumstances at the time and what you’d love to do during your retirement.
If you own your home, plan to pursue low-cost hobbies and spend more time with your family and friends, you may be able to live quite happily on 60 to 70 per cent of your previous salary.
However, if you’re planning a more adventurous retirement, perhaps travelling to distant countries or taking part in expensive activities, you’ll need a higher income, perhaps even more than you were earning in your last job.
Will You Be Able to Live on the State Pension?
Usually, the state pension just covers the basics of life — food, shelter and heating. If you rely solely on the state pension, there will be little money left over for holidays, entertainment and expensive hobbies.
Also, since the population is ageing, governments will find it increasingly difficult to fund pensions, so the amount you will receive may be lower in real terms than the amount pensioners live on today.
In Switzerland, the amount of state pension you’ll receive will depend on the number of years you’ve contributed to the AHV (Alters- und Hinterlassenenversicherung) scheme and your average annual income.
To receive a full Swiss state pension, you’ll need to have paid AHV contributions for 44 or 45 years, from the age of 20 to 64 for women or 65 for men.
To be eligible for a proportion of the full Swiss state pension, you must have contributed to the AHV system for at least one year.
So, if you haven’t spent your entire working life in Switzerland, you won’t receive the maximum state pension, although you may be able to claim state pensions from other countries you’ve worked in.
Find out the approximate value of your future Swiss pension by using the online calculator.²
How Much Should You Save?
Some financial experts recommend saving between 10 and 15 percent of your income starting in your 20s.³
However, if you start saving for retirement when you’re older, you’ll need to invest a higher proportion of your income to gain similar returns. For example, if you started your retirement savings at the age of 45, you’d need to allocate 27 percent of your annual income, according to the website, Investopedia.⁴
However, if you can’t afford to save the recommended proportion of your salary for your age, it’s still important to save something. You can always supplement your savings at a later date, if you receive a pay rise, bonus, inheritance or a windfall.
Maximize the Benefits of Occupational Pension Schemes
If you’re working in Switzerland and earning more than CHF 21,330, contributing to an occupational pension plan (in addition to your AHV contributions) is compulsory.
Make the most of the fact that, by law, your employer has to match your contributions to your occupational pension plan. So, save the maximum amount possible each year, if you can.
Also, if you’re allowed to make back payments covering previous years, it’s a good idea to do so to increase the value of your occupational pension plan.
Should You Take out a Private Pension Plan?
According to the website Expatica, the state and occupational pensions together are equal to up to 60 per cent of a person’s final salary before retirement. Therefore, to fund the life you’d like to lead during retirement, it’s very likely that you’d need a private pension, too.⁵
In Switzerland, private pension plans (also known as third pillar plans) are voluntary and self-funded. They are an excellent way of saving for retirement, especially if you don’t belong to an occupational pension scheme or if you’re self-employed.
Even if you have an occupational pension plan, it’s still a good idea to take out a private pension plan to increase your retirement savings. Since contributions to a private pension plans are tax-exempt up to certain limits, they are a useful and tax efficient way to supplement your retirement savings.
Private pension plans are usually flexible, so you can suspend your contributions at times when you not able to contribute due to other financial commitments.
Review Your Pension Savings Each Year
Review the amount of money you have in retirement savings each year to see if you’re on course to retire with the income you’ll need.
Fine-tune your plans as you get older. You may want to move most or all of your savings into lower risk investments as you approach retirement age, for example.
When Should You Start Planning for Retirement?
The quick answer to this question is: “as early as possible”. This gives your savings as time much as possible to grow. If you start saving in your early 20s, any future gaps in contributions will have less of an impact than if you begin saving for retirement at an older age.
However, if previous circumstances have meant that you haven’t saved as much money as you should have, it’s not too late to boost your retirement income.
Find out exactly how much income you’re on course to receive in retirement as things stand at the moment. Then, put a plan in place to increase that amount, whether it’s through additional contributions to your occupational pension, a private pension and/or other means.
References
¹ Ultimate guide to retirement
² How much will my pension be when I retire?
³Ultimate guide to retirement — How much should I save?
