How to build pension assets wisely so that we do not stay without money?On April 17, 2019 by Tanya Houle
You must have thought a lot about your retirement years. What would you like to do on your everyday life? To travel? Would you try things that you had no time / money in your active lives? Surely you will need money. But how could the pension assets be accumulated or acquired? In this article I will show you a very clever technique: how to build a pension asset?
We hope to raise your retirement age
Perhaps the best thing that can happen to you is when your retirement age rises and you stay healthy. I know it seems crazy today, but rely on international statistics to understand why I say this! In most developed countries, pensioners receive 60-70% of their final salary. So, relying solely on the pension system, they are guaranteed to spend less money on less money.
The College Research Center has calculated that if the age of retirement age is 66, only 50% of retired households would be able to maintain their current standard of living. If the age limit was 70, then 86% of the same households could live a comfortable life!
The answer is easy! Practically, families would have 4 years more time to accumulate pension assets. Of course, it works differently in the US, but is also very interesting as it is at our present moment:
- 65 years of retirement age
- Half of the pensioners live below the subsistence level
- In the future, it is planned to further reduce pensions
How do I calculate how much money I need?
There are many ways to calculate the amount of assets needed for retirement. However, since we do not know the future and play a safety game, I would like to teach you the most basic calculation method. The average life expectancy of Hungarians at the age of 76 is based on OECD data. Women live longer with us, with a life expectancy of 79, while men are 72 years old. More importantly, according to the data of the CSO in 2013, women may still spend 18.2 years in Hungary and 14.5 years after the pension . So we have to calculate this number line.
Life expectancy after retirement is 16 years
So we have to count on this value as both a man and a woman. Once we have our lifetime, we need to find out what amount of money we will need on a monthly basis this 16 years. Let’s say that we need 250,000 forints every month, and we assume that we get 100,000 forints at the worst in the worst case today.
We have to assume a small amount of money from the State, because the pension disaster will not arrive immediately, but pensions will continue to decrease in order to avoid a social disaster. This amount can be 100,000 for today (for a person with an average income).
We need to raise $ 150,000 from somewhere! This amount can be obtained from the release of an existing home property or from a well-built business. In financial terms, we are not dealing with this now, as it is assumed that a successful contractor or multi-apartment owner has a monthly spending of not less than HUF 250,000, but a significantly higher amount. The difference will have to be covered by these extra revenues.
Calculate the amount of pension assets!
The monthly amount to be repaid (HUF 150,000) must be multiplied by the expected pensioner months (16 years x 12 months = 192 months). This gives you a net present value (HUF 28,800,000). We should not forget that, in the future, this money will not be the same for inflation. That is why we must hit this amount in any future value calculator and assume an annual 2% inflation.
How can I collect this amount? – or how to build a pension asset
It is very important that we look at a concrete example now. However, everyone needs a unique calculation that is tailored to their income and age characteristics! As a first step, we need to distribute the required amount by 360 (30 years) to see how much we should set aside without a 0% yield and tax credit.
For many, this means their full monthly income at the moment. It is worth checking out how the price of bread in the last decade has evolved:
I would just like to add to the above data series that in 1990 we received the kilo of bread for 20 HUF! In 2016, we had to pay 227 forints. This has meant more than 11-fold growth over the past 26 years. So we get a roughly 30 year sample of inflation. But why is it important to us now? Most importantly, I think we could have bought 11-14 kilos of bread from the price of 1 kilo of bread today, nearly thirty years ago. So it wouldn’t be a problem to pay a kilo of bread today. In this way, it is not necessary to pay the 114 908 forints needed to accumulate our pension assets right now, because today it would be a burden, and in 20 years we might even feel a little…
We need to index our pension savings every year, that is, we have to pay 3-5% more year by year to never feel a burden, but at the same time we achieve our goal!
Tax credits, yields, indexing
Fortunately, the necessary pension assets should not be covered solely by our own contributions if we are willing to invest it, for example, through a pension insurance. In this case, for example, we receive a 20% tax credit for all payments , which is also invested, we have the opportunity to index, and we get a return on our secure investments. I have calculated how much I should put aside in my pension insurance!