A. Money from government

In developed countries, there is a basic pension or social security system for all its citizens over a certain age.

People in many countries are living longer and the growing numbers of elderly people increases the financial burden on governments. At the same time, there are not enough babies being born, reducing the pool of future tax payers. The obvious outcome is that governments will have to continue to cut back on pensions and care services for the elderly. There will be a growing problem of elderly poverty.

You should make sure you receive the benefits you are entitled to from your government in the pension and the social security system. Most countries have a health care system, housing subventions and other benefits for its elderly population. But don’t expect them to last forever, as these benefits will most likely be reduced over time, both in size and quality. To make use of alternative solutions means that you have to open your own wallet.

B. Money from your employer.

In many countries, the government has realized the growing problem of an increased welfare burden and has taken measures to encourage people to set aside a part of their salary for pension plans. The general opinion among experts is that you should do just that. This is often favorable for you due to advantages such as tax-incentives or having your savings payments matched by your employer. The management fee is normally also very favorable.

If you have control of the investments in such a pension plan, consider not investing too much of the pension plan funds in stock of your own company because if your company runs into problems you can suffer a double whammy of both losing your job and a greater part of your pension nest egg.
Important: If you have a pension plan with a guaranteed monthly amount paid out to you (defined benefit), do not give up or trade it for another plan before you have consulted with a neutral advisor.

Sometimes there is pressure from an employer or an insurance company with tempting arguments that a change in plan will increase the possibility to give you a higher monthly income (the risk of a lower monthly income is not always highlighted).

A plan giving you a known monthly amount has a high value because it increases the certainty of your income stream when you are older.

These pension plans were created with the expectation that they could create a nice and higher return for the individual on their funds, but that is becoming more difficult nowadays. Also, their creators did not factor in the expectation that average lifespans would be extended as they have. If even such pension schemes have a problem in generating a high return, why should you try? Why should you take the risk in an attempt to create a better return?

This is tough luck for them, but don’t let their problem become your problem!

Having said that, it is not always a bad thing to change plan. There can be situations where a company is having financial difficulties and you risk losing your pension plan if you don’t take action. There can also be tax reasons for making a change. Consult with an independent advisor in your country to gain unbiased advice.

C. Organize your private savings

With the income sources A and B above under pressure, you have to take control of your own destiny by saving money for the future. To save money today involves tough choices since you have to decide if you wish to give up consumption today in return for consumption later on. However, it is absolutely essential that you take this decision in good time, and don’t delay it.

One great advantage of starting a savings arrangement now is that you will more quickly find peace of mind thereby allowing you to focus on enjoying your life until retirement in the knowledge that you have taken precautions and don’t need to be constantly worried about your financial situation and your life in your older days.

It is very important to ensure that your private savings are secure, as this will be the money that can make the difference between a miserable and happy retirement.

You should make sure that the financial institution you choose to place your money is solid. Many governments have a savings protection scheme up to a limited amount, so it can be worthwhile to have several smaller, separate accounts at different institutions.

The biggest threat to your private savings is increased taxes or even outright confiscation of parts of your private savings in some regions of the world. Ten years ago, this would not be considered a significant risk, but with many governments now under increasing financial pressure, there is a serious risk that they could implement measures on private savings, such as a once-off tax. This has happened before in history in several countries and it can happen again. For example, the International Monetary Fund mentioned the possibility in one of their reports in 2013.

If the authorities in your home country permit it, you should really consider finding an offshore solution to create a pension plan with an established insurance company. As this is technically an asset of the insurance company which is registered offshore, it should be protected. Please note that citizens in most countries are still obliged to pay taxes on the returns from such investments. You should also note that this solution has a rather high fee structure, but it can be worth it in terms of providing peace of mind and eliminating many worries.

Please continue to STEP 2 to find out how you can organize your savings in an easy way, so that you are almost on autopilot with very little in the way of decisions and time required from you.

This is not investment advice, it is for general information and education purposes only.The information published on this site should not be relied upon as a substitute for personal financial or professional advice. Please contact a qualified advisor who is neutral, preferably paid by the hour and who understands your legal and tax situation. Also please be sure that you understand the situation fully before you make any investments.