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How Much Should I Save in My 30s and 40s to Have a Sufficient Pension?

While it might not be the most pleasant thing to worry about, we've all likely wondered what our life would look like in retirement at some point. At the same time, we're all aware that the state pension won’t be enough to provide us with a comfortable standard of living. That's why it's crucial to prepare in advance so that we can enjoy our golden years with financial security and peace of mind.

Emilio Gučec | Personal finance | 21. June 2024

Statistics show that an average man living in an OECD country is expected to spend 19.5 years in retirement. For an average woman, this figure stands even higher at 23.8 years.

This means that most of us will enjoy more than two decades in retirement, underscoring the importance of timely planning for our future pensions. The amount of income we’ll be able to draw after retiring greatly depends on the savings accumulated over the course of our working lives.

At Finax, we place a lot of importance on pension planning. Our typical clients fall between the ages of 30 and 40. Therefore, in this blog post, we will explore what their pensions could look like if they begin saving in their thirties or forties.

The Sooner the Better

Today, an average citizen of the European Union can expect to receive roughly 58% of their country’s average salary via state pension. Due to the ageing population (meaning there will be fewer people to pay taxes to support this system in the future), this number is expected to decrease to 48% by 2060. This means that people who are currently in their 30s can expect to receive less than a half of their working-age salaries from the state once they retire.

These figures mean that it will be difficult to maintain the standard of living you were used to before retiring from the state pension alone. While you will likely be able to cover the basic needs from this income, you will need some extra funds to secure a higher degree of comfort. I don’t think any of us want to be unable to treat our grandchildren to an ice cream or a day at the zoo.

Former U.S. President Thomas Jefferson once said, "do not leave for tomorrow what you can do today." It's crucial to begin retirement preparations early to secure additional income sources.

In the realm of investing, the power of compound interest can generate unbelievable results, particularly when given ample time to grow. This mechanism essentially means that investments grow faster and faster over time, like a snowball that takes on more and more snow as it rolls downhill. Let’s break down the exact numbers this can bring you in the following sections.

New Trends

Luckily, the future isn't all bleak. There's a noticeable shift in awareness about the importance of taking the future into our own hands. Unlike our parents' generation, we are fortunate to have a plethora of retirement savings options at our disposal, thanks to technological advancements, globalization, and the easy access to information. Today, you can kickstart your retirement journey for a better tomorrow in just ten minutes.

However, the pension landscape across the EU still isn’t ideal. This prompted the European Union to introduce the Pan-European Personal Pension Product (PEPP) as a competitor to existing options, aiming to address some of the gaps present in the current offering (such as low returns, high fees, or a lack of transferability across member states).

Finax has proudly emerged as the first PEPP provider in Europe. You can read about the great results these portfolios delivered last year by scrolling towards the end of this blog.

Beginning in the 30s

Now that we've outlined the pressing need to address the current pension challenges, let's delve into practical solutions. Let’s assume that the average salary in your country is €2,000 and that the average state pension is equal to 58% of that, so €1,160. We need a clear plan on how much to save and invest to maintain a comfortable lifestyle over 20 years of retirement.

In investing, longer horizons mitigate risks, allowing for more dynamic strategies, primarily investing in stocks. Research, empirical evidence, and Finax's strategy testing consistently confirm that allocating 100% of your portfolio to stocks during the savings phase and at least 60% during the payout phase is optimal.

It's crucial to consider that individual preferences vary – some require more, others less, to sustain their lifestyle. We will assume our savers want to maintain the same income they were used to receiving before retiring.

First, we have to take inflation into account. For simplicity, let’s assume that the average inflation until our savers’ retirement will be 2.5 % per year. We will further assume that both the average salary and the average pension will increase at a pace matching this inflation during the period before retirement.

*Due to inflation, both the average salary and the state pension will increase over time, widening the difference between their values. This means that upon retirement, you will need to draw more than today's difference of €840 from your savings to keep the same income you had during productive age.

In this scenario, let's consider a saver who invests in a 100% stock portfolio until their retirement age of 65. At the age 65, the portfolio will have a 60:40 allocation (equities: bond ETF funds) during the payout phase, maintaining this ratio for the next 20 years.

During the saving phase, the assumed annual return for the 100 % ETF stock portfolio is 7.95 %. For the payout phase with the 60:40 strategy, the return used in the calculation is 5.97 %.

Note: All data related to the historical development of Finax portfolios are modeled and were created via backtesting. We have described the method behind these simulations in this text: How does Finax model the historical development of its portfolios? Past performance is no guarantee of future returns, and your investment may result in a loss. Inform yourself about the risks involved in investing.

If you're 30 years old, you have 35 years until retirement. Over this time, the difference between the average pension and salary would grow to €1,993. This is the amount we will need to draw as a supportive income from our pension savings over the following 20 years.

According to the calculations of Finax algorithms, you will need to save up a total of roughly €335,500 to draw a monthly income of €1,993 during retirement.

Once you save up this amount and retire, you will transfer it into the mentioned 60:40 payout portfolio. As we can see in the graph below, the total amount paid out at the end of the period will be €580,980, which clearly shows that we are expected to earn some extra money by keeping the savings invested.

It is important to note that this calculation assumes that your monthly pension will increase every year to match the long-term inflation, enabling you to maintain the desired standard of living throughout retirement.

Let’s now use Finax algorithms to calculate how much you need to set aside to accumulate €335,000 by the age of 65. As can be seen in the picture, this goal should be reached if you invest €158 every month over the next 35 years.

By making relatively smaller contributions now, we can enjoy financial security later. You can also apply the well-known 50/30/20 rule, a popular budgeting method that divides your monthly income into three main categories:

  • 50% of income - necessities: This part of the budget covers our necessary expenses, such as housing, food, transportation, childcare...
  • 30% of income - wants: the difference between needs and wants is not always clear and can vary. In general, wishes are extras that are not necessary for life and work, and often include various monthly subscriptions, trips, entertainment, restaurants...
  • 20% of income - savings and debt repayment: use this part of the budget to pay off existing debts and create a financial cushion. For example, savings for retirement, emergency fund...

Our example confirms that this method works, as monthly pension savings of €158 represent just 8% of your €2,000 salary.

Beginning in the 40s

Investing early offers a significant advantage thanks to the power of time, making it crucial to start as soon as possible. But if you haven't had the chance to begin earlier, don't lose hope. There's still time to prepare for retirement, though it's important to recognize the valuable time that's already slipped away, during which your investments could have been growing. This means you'll need extra discipline moving forward.

As retirement age approaches, our focus naturally intensifies. Suppose we start investing for retirement at age 40, giving us 25 years until retirement (plus 20 years in retirement). The principles remain as before: during the savings phase, we invest in a 100/0 portfolio, and after reaching the age of 65, the portfolio allocation will change to 60/40, remaining so until the end of retirement.

In 25 years, the difference between the average pension and salary will amount to €1,557. You may be wondering why the monthly amount is lower than when investing at 30 years old. The reason is that a person who starts saving at age 30 has 10 more years until retirement, during which inflation will further increase the difference between your salary and the state pension.

In this scenario, we aim to have €260,950 by the start of our retirement payout phase (at age 65). As illustrated in the graph below, the total payout at the end of the period would be €453,864, indicating a potential earning of almost €200,000 thanks to keeping the savings invested during retirement. Similar to the previous example, our monthly payout increases annually to match the inflation rate. 

As we delve deeper into the evolving trends of retirement savings, we encounter a significant shift. At the age of 30, our calculations suggested a monthly saving of €158 was sufficient, but by the time we reach 40, the target jumps to €289 per month. This incremental increase aims to ensure we manage to accumulate the required amount over a shorter period of 25 years. Just imagine the substantial savings if one starts investing at 20! Even Einstein stated that compound interest was the 8th Wonder of the World.

While this may seem like a larger amount, it's important to note that income typically rises with age, peaking statistically around 50. According to the US Bureau of Labor Statistics' survey of American earnings by age group, the median wage in the United States reaches its peak between the ages of 45 and 54 . This means that although you will need to set aside more in later years, your ability to save also increases as your income rises.

Better Late than Never

Although it is mathematically and statistically most profitable to start looking after your retirement as early as possible, it is never too late to start. A person who starts saving in their 30s can accumulate €335,000 by the age of 65 by investing €158 per month in a 100% stock portfolio, which is more than enough to provide them with an extremely comfortable retirement.

After retiring, it is recommended to switch to a 60:40 ratio of stocks and bonds to ensure that your pension savings continue to grow, allowing you to increase your monthly pension by the rate of inflation.

For those who start saving in their 40s, monthly savings during the productive age should increase to €289, reaching €260,950 by retirement. Despite the higher monthly contributions, creating such savings should be manageable due to career progress and income growth.

Overall, a disciplined savings and investment strategy that takes inflation into account and is tailored to individual preferences is key to maintaining a comfortable lifestyle in retirement. The 50/30/20 rule can help you manage your money effectively, making it easier to allocate funds for your retirement.

It's never too late to take your future into your own hands.

Secure a Comfortable Retirement

At Finax, we offer several options for building up retirement savings, from classical retirement saving via ETFs to the European pension .

The smartest thing you can do is start investing right now. If you decide to wait, you might deprive yourself of the decent golden years full of trips with grandchildren we all long for. As we have established here, don't leave for tomorrow what you can do today. Every additional year of investing can mean a huge difference in your standard of living tomorrow.

Emilio Gučec
Emilio Gučec
Business analyst
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