#13 – What Will Your Retirement Look Like?

Episode 13 – Transcript

Hello and welcome to another episode of the Financial Harmoney Podcast. This is episode number 13: What will your retirement look like? 

So I want to start today asking you to close your eyes for a moment and fast forward to when you are of retirement age. That used to be 65 in many countries, and I think the UK until very recently still had it at an even lower age than that for women, but the official retirement age is now gradually increasing in many different countries around the world. So it might now be 67 or 68 and who knows by the time you reach retirement age, it might well be 70 for all we know. But regardless of the exact age, I’d like you to think about you being retired for a moment and picture what you’d be doing then. 

Will you be spending lots of time with your children or grandchildren? Will you be travelling the world? Will you be joining a golf club or start a new hobby? Or will you start another degree at university, this time just for fun? Or sip cocktails next to your holiday pool 2 months a year? Learn another language? Write a memoir? Haha there is so much to do really! I’d say these options might make for a fairly nice retirement, providing you are healthy and have your loved ones around you of course.

But there is another scenario possible, let’s go and picture that one for a moment. The one where you can’t actually retire because you don’t have enough money to do so. The one where maybe some of your friends get to do all the fun stuff that I described just now, because they did invest in their retirement throughout their life. The one where you don’t get to see much of your grandchildren because you can’t retire as you need to pay for your bills. The one where you feel tired and unmotivated as you’re still working your socks off now you’re well into your 70s! 

This is a really sad visualization and one that I hope will not become a reality for you at any point, which is why in today’s episode I want to talk about retirement and retirement planning. This is something so super important but, if you’re like me, you might never have learned about any of this in school or at any other point in your life. You will likely need to go and do some research yourself. Well I hope to help you with that research a little and get you started to make sure that you are on track with your retirement plan and goals. And if you’ve never ever looked at this before, then I hope that after today’s episode you’re ready to create a plan and get this thing called retirement sorted!

What I’m going to do is look at the three principal ways to get a retirement income and I’m going into each one of them in detail, so that you know where to get started or what to look for with each one. And remember that this might all sound a bit boring but I hope you realize that if you want to avoid that second scenario of not being able to retire from taking place, that you really need to power through for a moment and your future you I am sure will be immensely grateful for it all when you are sipping your cocktail next to your holiday pool looking back at the moment you decided to take action. 

So before I continue, I just have a bit of a warning here, as the retirement options or provisions vary a lot per country, so after listening to this episode you’ll need to go off and find out what exactly the situation is in the country where you live. But don’t let that deter you from diving in, and get started today to create the peace of mind knowing you’ve got a plan to make sure your retirement will be the way you want it to be! 

In general in most countries there are three different ways that you can provide for your retirement. The first one is a state pension or social security. This is provided by your state or your country. A second one is a workplace retirement plan, which is often made available to you by your employer or by a union or industry employee organization. Then the last option is a private retirement plan, often available through banks, insurance companies or investment companies. 

So I’m going to talk about each one in turn to help you get a better understanding of the various options available. 

So first up is the state pension or social security. What’s special about this is that it’s made available by your national or state government. So during your active working life you will likely pay taxes on your income and some of those taxes are specifically designed to fund the retirement provision for the retired population. There are two ways a government can set up their retirement funds: through funded or unfunded accounts. In an unfunded account plan, the money that is paid in this month by the countries or states’ workers or employers is paid out to today’s retirees. So by the time you retire your money will come directly from the people who are then paying retirement taxes on their income, so by the active workforce. Another option is to use funded account plans. In these retirement plans your money will be used to pay out future retirees, including yourself even. So you’ll very broadly speaking be paying for your own retirement. The challenge with a funded account is that money loses its value over time due to inflation. So if you pay in $300 in your retirement today then in 10 years’ time that will be worth a lot less. At a 2% inflation rate, it would be worth only $245 by then, and in 20 years time this will be just $200. So you can imagine that this isn’t a great prospect. So to counter the devaluation of that money, governments invest the retirement money in order to hopefully create greater returns and so have more money available by the time they need to pay out that money to the retirees.

So for all you know, if you aren’t personally investing any money at the moment, the money that you pay in taxes and that might come back to you in the form of a pension, might well already be invested if your country uses a funded account retirement provision. 

I’ll now talk a little bit about some of the advantages and disadvantages of a state pension or social security. First of all, let me start by saying that having a pension provided by the state, even if that means that you’re paying for it yourself during most of your active worklife, is of course an immense privilege. So let’s absolutely be grateful for this set up if you live in a country that provides a state pension, as it means that you’ll hopefully at least have some money coming to you by the time you retire. In some cases you might be getting a retirement provision based on your latest or your average income over a certain period, but many countries just have a standard amount that they pay out to everybody, regardless of whether you made $1,000 or $10,000 per month before. Now there are certain conditions usually in order to be able to qualify for this social security payment, and these can vary greatly depending on where you live and work, but they usually require a minimum amount of years worked and therefore taxes paid. 

Now some of the disadvantages. Most of the time, the social security or state pension isn’t actually that much money.So it means that if you made quite a decent living throughout your work life, you might suddenly find that your monthly income drops significantly if you just rely on this type of pension. 

A second more worrying disadvantage is the sustainability of this set up. Many countries have an aging population, with people living far longer than when these social security plans were originally set up, meaning that more and more people rely on this income for far longer. Added to that, birth rates are dropping significantly, so there are fewer younger people joining the workforce who can pay into these retirement funds. And this is why as I touched on before, many countries have started to increase their official retirement age so that people continue to work for a few extra years – and thereby continue to pay retirement contributions – whilst also reducing the amount of money they’ll be paid out by the retirement fund, as they won’t start needing this income until a few years later. But that might make you wonder what the situation of these retirement options will look like by the time you reach retirement age. For all we know, the retirement age might well have increased even further or pay outs might have been reduced significantly by then.

All the more reason I believe to make sure you look into your own retirement now and don’t leave it for the future. As with some careful planning, you’d be able to avoid a lot of surprises and struggles.

Let’s move on to the second type of retirement provision that you might qualify for, which is via your employer or your work sector. In many cases your employer or your union or industry organization can offer you a retirement plan that you can invest in. Now this is usually optional, meaning that if you don’t opt in, you won’t be making any contributions, and therefore you obviously won’t be able to claim any money here when you retire. If you live in the United States or have read about these types of retirement provisions, then you might know that these are called 401(k), that’s what they are commonly referred to in the States, but these exist in many places around the world, they’ll just have different names. But this is essentially what a workplace retirement plan is. 

So how does this work? You need to as said opt into this plan, in most cases you won’t automatically be enrolled. And when you do you can decide how much money you’d like to invest in your retirement provision every month. There is usually a maximum annual amount here meaning you can’t contribute more than that. Now some super awesome advantages of participating in this type of retirement plan. Firstly the money will be taken out of your paycheck BEFORE you get paid. That means that once you set this up and adapt, you won’t even notice that you’re paying out the money as you won’t realize it was there. It basically never gets to your bank account. Whilst in the background you’ll be building up a nice retirement fund. 

Then another nice advantage is that you’ll likely qualify for tax deductions on this type of retirement saving as governments want to encourage people to provide for their own retirement. That means that the money you pay into your retirement plan is often tax free. So you don’t pay taxes over that money. This tax discount is usually offered in one of two ways: either when you pay in, so that means that you pay in the full amount of money that gets taken out of your gross wage, and not your net wage. OR when you start withdrawing your money from your retirement fund so by the time you retire. That means that you won’t be paying taxes by then you’re retired on this money that you withdraw from this fund. 

Now as this is an individualized retirement plan, so literally the money that you pay in will be your money, the money will just like before, need to be invested in order to beat the inflation between now and the moment you retire. So again, if you are participating in some type of retirement plan then you are likely already investing in the stock market, but maybe you didn’t realize this until now. 

A disadvantage of this type of retirement provision is that the way the money is invested is often not very clear or might be done in investing options that have substantial costs associated with that type of investing, so the returns on your money might not always be the most efficient ones. That said this is a very good and easy way to invest money in your retirement. 

Now one last advantage, which is especially applicable to anybody in the United States who has access to this type of retirement plan, as I don’t think it is as common in other parts of the world, but some companies actually offer to match your contribution up to a certain percentage. Meaning that if you pay in let’s say a percentage of your wage every month, your company might do exactly the same on top of your payment! So yes, that essentially means free money. As said there is often a limit on this, so you can’t say I’ll pay in like 25% of my wage and then my company will also pay in that amount. There might be a limit of say 3% for example. Meaning you can still pay in more in most cases – unless you’ve reached that yearly limit I mentioned before – but the company will only ever pay in whatever corresponds to 3% of your wage.

But as you can see  – I hope – this is a fabulous way to build up retirement savings, especially if your company matches your contributions. But even if not, it is well worth looking into this type of retirement saving if you haven’t already.

That takes me to the third and last option that I want to talk about with regards to retirement savings. And that is the option to invest in a private retirement plan. Now this is especially important if you don’t have access to a workplace retirement plan, because your company doesn’t offer this, or if you are a business owner of a small business or work as a freelancer for example. This is an excellent way to build up more money for your retirement, even if you are going to be able to claim a state pension or social security, as it means you’d have more funds available and you’d be able to execute a bit more control over you retirement provision then if you leave it all up to the state. Again if you live in the United States or know a little bit about retirement accounts, then it might help to know that these types of retirement plans are often known as IRA(s) or Roth IRAs in the States, but of course they’ll have different names in different countries.

Now, the challenge with this type of retirement plan is that you are going to have to work it all out yourself. Your employer won’t just present you with one option available and then you’re good to go as is the case with a workplace retirement fund. You’ll have to dig in some of the options in order to decide which option is right for you. But don’t let this potentially scary sounding responsibility stop you from doing this, as really once it is set up, it will be super easy to maintain and you’ll be forever grateful that you’ve put in the work ahead of time and not leave it all up to the moment you retire. In most cases you’ll find that there is a tax advantage for any contribution you make to a private retirement fund in the same way as they exist for workplace ones.

Okay so now that we have looked at the various options, let’s talk about what you can do next to make sure that your retirement will look the way you’d like it to look and won’t be full of surprises or empty funds and bank accounts.

Here’s my 3-step plan for you:

First of all find out what your social security or state pension is going to look like. You’ll likely be able to find this information for your country or state online, so go ahead and find out all the details such as monthly amounts, requirements that you need to meet in order to qualify for the money, current and projected retirement age and anything else you can find that might be applicable to you. That gives you a first indication of what your monthly income might be by the time you retire, providing of course that you qualify and that the conditions don’t change too much between now and then. 

Then as a second point, I recommend you go off and find out if your employer offers a retirement plan, and then make sure to find out all the details here too. Such as minimum contribution per month, annual limit, whether your employer matches your contribution etc. Or if you are already participating in a retirement plan via your job, then I suggest you go and find out how much you’ve already contributed and what your projected amount will be by the time you retire. 

Then lastly, go and look into some private retirement options. Check out what is available, what the different conditions are and whether you should and can invest some money into your retirement via a private retirement plan at the moment. 

Together these three options, or maybe two depending on your situation, will hopefully start you off on investing in your retirement in a continuous and solid way, so that by the time you retire you finally get to do all the things you’ve been dreaming of for years! 

I hope you found this useful as a first introduction to retirement planning and that you’ll use this information to take action for your own retirement. 

And as we’re getting to the end of this episode, I’d just like to remind you to subscribe to this podcast so that you’ll automatically be notified of new episodes every week. And if you can leave me a review, I’d be beyond excited as that really helps visibility of this podcast, meaning people will find it easier to find it, so that would help me and other listeners really! 

So that was it, the end of this episode of the Financial Harmoney Podcast With the three types of retirement savings. I hope you enjoyed it, make sure to subscribe and I’ll see you next time.