3 tips for your retirement planning in 2021

Studies worldwide have consistently confirmed that people are not saving enough for their retirement or not saving at all. Sadly, with the average age of retirement increasing, more than half of the population can never afford to retire. Start as early as possible - this is the golden advice. But how and where do you start - it is rarely explained.

State pensions and employment pensions were an obvious choice for retirement in the past; however, it is not the reality in the current financial climate. With State and employment Pensions lowering and the average elderly population rising, retirees have to look to other methods to fund their retirement.

Here are three tips for your retirement planning for 2021:

  Voluntary pensions
  Investing on the side
  Real-estate

Voluntary pension

Before going into voluntary pensions, we must discuss the employer-based ones. Employer-based pensions are reasonably common for people to have aside from state pension for those who are working. Employer pensions cover not only retirement savings it also covers healthcare. The benefit of an employment pension serves both the employer and the employee as the employer receives tax breaks, and the employee enjoys financial security.

Every country in the world has its variants of employment pension, and in some, it is mandatory to offer retirement plans for their employees. The USA provides 401(k), while the UK has a Workplace pension. Estonia offers employment pension under its Pillar II. However, the contribution made to employee pensions is meagre and will not be enough to rely on. Additionally, to be able to qualify for one, employers must fulfil some criteria. These criteria are subjective to each country. And it also depends if you can keep your job. Hence, it is better if you also opt for a voluntary pension scheme for early retirement. They are often called retirement funds. The benefit of a voluntary pension scheme includes tax breaks.

Moreover, some countries invest the money in funds that ensure more robust retirement security. Again, each country has their versions of a voluntary pension scheme. For, e.g. in the UK, you can take early retirement at 62 with their Lifetime ISA. In Estonia, Pillar III offers people to save extra for retirement with tax breaks and allows them to withdraw five years before retirement. There are also private companies that offer voluntary pensions. People have to look for the best retirement planning options near them.

Investing on the side

Apart from pensions and retirement funds, many supplement their retirement by investing externally. The most popular ones include stocks, bonds and funds, and there are many ways to invest in them:

• People can buy stocks directly or through funds to limit risk exposure. The goal should be to think long-term and diversify their risks. Investors must keep in mind not to panic when prices fall as they tend to fluctuate. Depending on the current age, young investors can take on more risks for greater returns, and as they age, they can reduce their risks by opting for bonds.
• Bonds are safer than stocks as it offers an annual payment on a fixed interest rate. Generally, they provide lower returns and are affected by inflation, therefore, not solely sufficient for retirement. And, of course, even bonds have their risks of defaulting. Nevertheless, the overall aim is to dilute stakes by diversifying, holding both stocks and bonds. Stocks will aid financial growth, while bonds will balance out the risks.
• As mentioned before, investors can buy stocks through funds. For funds, you need to observe whether it is actively managed funds or passive. Actively managed funds charge higher fees than passive ones. But funds, in general, are balanced with growth and risks because they hold stocks and bonds. There are several funds, the most popular ones being mutual funds, index funds, and exchange-traded funds. Mutual funds have a professional fund manager to choose your stocks for you. In index funds and ETFs, you cannot pick stocks and instead, it tracks a benchmark index. Hence mutual funds are higher in fees than index funds and ETFs. ETFs are similar to index funds, but you can trade them at any time of the day. The funds' goal is to observe the fees - generally, funds with lower costs are more optimal than returns.

Real-Estate

Real-estate is one of the most well-received ideas for retirement planning. With its prices appreciating, more people want to take a slice of the market to ensure their retirement. Traditionally, those who already can afford to buy a real-estate will go for multiple real-estates for rental income. The problem for many is, however, is the initial investment required. Nevertheless, there are many options available nowadays to participate in real estate investment. It has become more accessible through fin-tech. Crowdfunding is a well-established way to invest in the real-estate market where the crowdfunding company pools capital together from investors and invests in real estate. The company then receives income through rent and payout to the investors. A Real Estate Investment Trust (REIT) is an example of crowdfunding, and it pays its investors through dividends. The income also has tax benefits, and the risk is diluted by having several types of real estate in the portfolio. However, since it's also an investment in one asset class, it also carries some risks.

Achieving retirement has become more dynamic than before. Retirees are no longer relying on one source of income to prepare for their retirement. Most people invest their money to ensure that they can retire with enough resources to live the remainder of their lives. Some even have achieved early retirement - a goal which is becoming more popular. The important fact is to start early, invest your money and ensure that your risks are limited.

Last update: 08/03/2021