How to plan your retirement
Why it pays to start early, how much you need and how to build your complement to the public pension.
Retirement seems far away until it is not. The good news is that, thanks to compound interest, you do not need to contribute huge amounts: you need to start early and be consistent. This guide sums up how to lay out your retirement plan step by step.
Why start as early as possible
Time is the decisive ingredient. Someone who starts contributing at 30 can reach retirement with double the capital or more than someone who starts at 40, even if both contribute the same each month. The reason is compound interest: each extra year multiplies the effect. If you are running late, do not be discouraged; you will simply have to contribute more and keep the discipline.
How much you need: the 4% rule
A quick way to estimate your goal is to multiply by 25 the annual expenses you expect in retirement (it is the flip side of the 4% rule). If you estimate spending €20,000 a year, you would need about €500,000 of capital, assuming you could withdraw 4% per year adjusted for inflation with a low chance of running out in 30 years. It is an indicative reference, not a certainty. Work out your figure in the retirement calculator.
A concrete example
Contributing €300 a month from age 35 to 67 with an average 5% return would accumulate around €277,000. Of that figure, only about €115,000 would be your contributions; the rest is added by compound interest. That capital, spread over a 20-year retirement, is about €1,150 a month to complement your public pension.
What vehicles you can use
- Pension plans: often offer tax advantages on contributions, but are taxed on withdrawal and have limited liquidity until retirement.
- Index funds and ETFs: more flexibility and low fees, ideal for the long term. You can withdraw whenever you want (paying tax on the gains).
- A combination of both: many savers use the pension plan for the tax advantage and complement it with index funds for flexibility.
Do not forget the public pension or inflation
Your total income at retirement will be the sum of your private savings and the public pension you are entitled to. It is wise to check your estimated pension and not rely only on it, because the replacement rate (pension relative to your last salary) tends to fall. And remember to always reason in real terms: with inflation of 2-3%, money 30 years from now buys considerably less than today. You can see it in the inflation calculator.
Mistakes to avoid
- Putting it off "until next year". Each year lost is hard to recover.
- Relying only on the public pension. A private complement reduces uncertainty.
- Not reviewing the plan. Income, expenses and goals change; review your contributions from time to time.
Once you have your goal, simulate different scenarios in the retirement calculator and reinforce concepts with the compound interest guide and the guide on how to start investing.
