Life expectancy can impact your retirement planning.
There are other key factors to take into account when planning for your retirement.
The first is inflation. Inflation represents the general sustained increase in prices resulting from demand for goods. Obviously, prices of selected goods may increase for reasons unrelated to inflation. A practical example being the cost of Maltese bread. At €0.16 in 1992 this increased to €0.99 in 2020. The difference in the selling price is 6.2 times more than the cost of a loaf of bread 28 years ago. As prices rise, wages and salaries also have a tendency to rise. However, money put aside, if not invested, will keep its value over time but will not increase. In other words, a €100,000 in savings today unless protected from inflation will have a lower purchasing power in 10 years’ time as the cost of goods and services would have increased.
The social security pension system protects your pension income against inflation. For persons born on and after 1961 protection is directed towards retail inflation – the cost of living allowance by which the Maximum Pensionable Income is adjusted annually. For persons born on and after 1962 protection is not afforded only against retail inflation but also against wage inflation. This is an important measure introduced as part of the 2007 reforms. Normally, wage inflation increases at a faster rate than retail inflation. Linking wage inflation with the pension income would mean that the pension income will grow at the same rate that wages grow – this is a 100% wage inflation index. This is costly to introduce in a pension system. Thus, the wage inflation indexation for the pensions system is set at 70% – that is for every €10 increase in the average wage, the pension income will increase by €7. This means that over time, the gap between the pension income and the average national wage will continue to grow but at a slower rate.
When looking around for a personal private pension see whether the product you are considering provides an ‘inflation’ guarantee – that is, other than the investment rate of return – that ensures that you investment is annually adjust to take into account increase in inflation. If you are not sure whether the product you are considering offers this inflation guarantee make sure that you ask. If it does not ĠEMMA suggests that you look around at what the market offers. Certain providers may make this inflation guarantee available at an additional costs. Work out your sums – it may be worthwhile to pay this additional premium to the yearly payment yet in doing so safe guarding your investment against retail inflation.
It is important that if you are in a position to do so, you start saving for your retirement at an early age. As important is that you educate your kids so that they too start saving for retirement early. Note that saving €83 monthly for 40 years from the age of 25 years will, as a result of a cumulative interest rate of 2.5%, give a person a retirement nest egg of €70,000 or so.