Many of us feel like we have plenty of time until retiring, putting this matter low on our current lists of priorities. After all, one has no idea what will happen in the next 5 years, let alone 20 or 40, making it more convenient to focus mainly on the nearing future and the present moment. 

However, now is the best time to secure a decent standard of living during your golden years. Why is that so?

1. You Will Spend a Significant Part of Your Life in Retirement 

According to a Eurostat report from 2022, an average male is expected to live up to 79 years and an average female up to 84. For comparison, that is 7 and 5 years respectively more than in 1990. We get to live longer and longer, which is great news!

Technological progress, especially in the field of medicine, is the main reason why our lives are getting longer and their quality is improving. And there are no signs of it slowing down, quite the opposite. Therefore, it is safe to assume that the current trend of increasing our life expectancy shall persist.

That means you’ll likely spend a significant portion of your life in retirement. For instance, an average female European spends approximately one-fifth of her life as a retiree.

Now think to yourself, how do you imagine this period of your life? I assume you want to live comfortably, without having to fear whether you’ll be able to afford the rent or medicine. To have time to take care of the garden and to play with your grandchildren. Perhaps travelling and exploring the world.

You don’t have to be Einstein to understand that you’ll need money for that. Keep in mind though that during this period of life, you won’t receive a salary for a few years or maybe for entire decades.

So, if you want the ability to have a comfortable life during these years, you must take care of it beforehand. Earlier than you might think, because…

2. State-Provided Pension Is Unreliable and Insufficient

...if you’re counting on the state to take care of you, then you’ll be most likely disappointed. Governments rely on the current working population to fund pensions via taxes and social security contributions.

As the number of retirees increases and the size of the working population shrinks, there are more pensions to pay out and fewer people to pay for them. The demographic situation is already not very pleasant. Count in the expert forecasts, and you are left with few reasons for optimism.

As of now, the average pension in the EU is a little more than half of the average salary. We call this indicator “the replacement rate” and it currently stands at approximately 58% of the average income. Too little?

The combination of increasing life expectancy, low birth rate, and relatively low retirement age makes this number’s future path to be more than clear. And it is not a positive one.

According to the European Commission’s 2021 Ageing Report, the replacement rate shall drop below half of average income by 2050 and will continue dropping even further after 2060, down to just 48%. In some countries, like Poland or Slovakia, the situation is even worse, with the expectations of the replacement rate dropping to 25% by 2060. In other words, as an average citizen, you will receive… between one half to one quarter of your previous salary upon finishing your career.

Is this amount enough for your dream life?

3. Small Amounts Today Make a Great Difference in the Future 

If your answer is “no”, and you have not built up significant savings yet, have no fear. What is even more important than the total amount invested is how much time you give your money to work for you. Even if you invest smaller amounts regularly over a long time period, you truly may amass a fortune so large it will be hard to believe today.

Your best friend in this pursuit is the so-called “compound interest”, thanks to which your assets may grow faster and faster (exponentially) the longer your investment lasts. How does it work? Just like a snowball, which accumulates more and more snow as it rolls downhill.

Invested capital grows faster at later stages of your investment, as it does not only earn returns (or interest) on the originally invested capital, but also on the investment profits (or interest) from the previous years. You essentially earn returns on your previous returns. You can see that in the chart below: the lines are curved rather than straight, getting steeper in the investment’s later stages.

The graph shows the results of investing 100 Euros a month with an average annual investment return of 7% after 45 years (beginning at 20), 35 years (beginning at 30) and 25 years (beginning at 40), assuming you retire at 65.

The earlier you launch your snowball, the faster it rolls and the more it grows.

4. Don’t Want to Wait Until 70? You Don’t Have to! 

You have yet to spend a few decades in the job market. Looking at the current demographic situation in Europe, it is safe to assume that the official retirement age will eventually be set even higher than it is today.

Is the idea of working until 70 keeping you up at night? You refuse to wait for the state to allow you to leave for a well-deserved rest? What if I told you there is a way to take this matter into your own hands?

Retiring doesn’t necessarily have to start after reaching an arbitrary age decided by those in power. Of course, early retirement is not a simple thing to achieve. Nonetheless, many have decided to accept this challenge (and they are growing in numbers).

The followers of FIRE (Financial Independence, Retire Early) strive for financial independence, aiming to retire as early before the official retirement age as possible. Their greatest ally is a long-enough investment horizon (time over which they regularly invest a portion of their income).

5. You Can Pay Less in Taxes

If you could freely choose the portion of your income that would be given up in favour of the state, how much would it be? 1%, 2% or maybe 10%?

You don’t get to choose in real life. Whenever you invest, you are subject to the so-called “capital gains tax“. This tax forces you to share a portion of the earned investment profit with the government. However, if you think the only certainties in life are death and taxes, you may be wrong about at least one of those things.

Politicians, at least to some extent, are aware of the enormous flaws of the pension system. Therefore, they’re trying to motivate us to take care of our pensions on our own. That’s why various tax exemptions are currently in effect across Europe, as well as numerous programs offering a variety of advantages.

For example, our Intelligent Investing portfolios (which you can use to save for retirement) are composed of the so-called exchange-traded funds, or ETFs. These securities are often subject to lower tax implications or even fully exempt from tax, depending on the country.

Let me state a couple of specific examples. In Croatia, ETFs are exempt from tax upon being held for more than 2 years, in Czechia after 3 years, and in Greece even without a minimum holding period (as long as the ETF is domiciled in the EU).

Another interesting example is Belgium, where they are fully exempt from capital gains taxes if they invest only in stocks (which is reasonable with decades-long retirement investing). Try searching the Internet for the exact tax benefits in your country, you might be pleasantly surprised!

Apart from tax incentives, they further offer lucrative long-term returns, low fees, broadly diversified risk between thousands of stocks and bonds from all across the world, as well as simplicity and high liquidity. 

Take the future into your own hands. Do not let your pension depend upon the will of those in power and the unpleasant demographic trends. Finax offers a carefree yet effective solution. The earlier you start, the less money you will need to set aside to ensure stress-free and comfortable golden years.

If you do not trust yourself enough, being afraid you’d lose the necessary discipline (either by withdrawing and spending the money before retirement or by failing to keep making regular contributions), we have another solution for you: the European pension (PEPP), a voluntary retirement saving program overseen by the European Union.

Its tax benefits vary across countries, but overall, it poses as a very cheap investment solution. For example, in countries like Bulgaria, Poland, or Croatia, the returns are fully exempt from capital gains taxes. In Western Europe, on the other hand, most countries made contributions to PEPP tax-deductible, similar to the local voluntary pension saving schemes.

Finax’s European Pension portfolios are built on ETFs, just like Intelligent Investing. What is unique is that the savings are tied up until the retirement age (the contract may be terminated prematurely only in specific cases). This may represent a huge advantage for people who are afraid they would be tempted to spend the accumulated savings before retirement.

Peek into PEPP’s key information documents for the 100/60 or 80/60 strategy, which I’m sure will answer most of your questions.

Keep in mind that you will never get your time back, and it will pass nevertheless – faster than you might think. Use your time wisely, your future self won’t be able to thank you enough.

Investing is associated with risk and the result might also be a loss. Past performance is no guarantee of future returns. Stay informed on the risks you’re exposed to when investing.

Tax treatment depends on each investor’s individual situation and might change in the future.