There will be nothing left anyway
It doesn’t matter how young you are, retirement is always in the back of your mind. There are constant reminders that we should plan for the future, save and invest, build our 401k and all the other things that sensible people do.
Still, we do nothing about it. We just let that nagging feeling die off until it reemerges again in the form of guilt.
There is a lot of information out there about pensions and retirement but most of it is confusing and complicated. You shouldn’t really care about the fine details until you have grasped the main points.
As far as I can see, these are the options:
Don’t rely on this one alone. It won’t be enough.
The estate pension system was designed in Germany at the beginning of the 20th century when the average life expectancy was 62 and 80% of the population was below 40. So, a lot of young people working and contributing to the system and very few people retired. That’s a triangular-shaped population pyramid.
Now, people live till their late 80’s, and there are more people retired and withdrawing from the pot than workers contributing. That is an inverted shaped population pyramid and that is not sustainable.
Just to give you an example, Japan sells more adult diapers than baby diapers. Think about that for a second.
Industrialized countries are aging very rapidly and there is no enough money to support the social security system. Simple math.
So, if you get something, great, but don’t count on it.
When governments realized the pension deficit looming over, they reacted by forcing companies to provide pension plans for their employees.
But this isn’t working very well either…
At first, companies were providing Defined Benefit (DB) plans — the employer promises a specified pension payment monthly or yearly.
Soon, they realized they couldn’t afford that, so they switched to Defined Contribution (DC) plans, in which the employer matches the contribution made by the employee and that goes into her pension. That money is invested, and when you retire, if everything goes well, you’ll enjoy a generous pension.
The main difference between these plans (DB and DC) is that the former, promises you a certain benefit in the future, while the latter doesn’t. In a way DC is more honest — give me all your money and I’ll see what I can do.
The problem with both is that they rely on investments and the historical track record for Mutual funds is less than spectacular — 2% historical average returns. Well below the market. Some people even call it a scam.
On top of that, people are living longer, so the pension pot has to be spread over a longer period. This creates a bigger deficit and makes the system unsustainable.
My take on this: contribute the bare minimum to your company pension and don’t expect too much of it. The only exception is if you lack the discipline to save, then you have to set up an automatic system that invests your money before it gets to you. For this, your company pension can be as good ( or as bad) as any other.
Everybody is going on about the importance of investing, compound interest, the stock market, real state, etc. The thing is, none of these will give you a guaranteed return and they could lose all their value overnight.
The stock market
As the mantra goes: the historical average stock market return is 10%. That’s probably true in the long run but still, the past doesn’t equal future. Everything is changing fast and that could be one of those things. Baby boomers are retiring now, so, who is going to keep pushing the prices up? We’ll see, but I wouldn’t count on it.
That’s the other investment myth. The experts keep saying that the only way is up, but I don’t believe it. It will depend very much on location and that’s impossible to predict for the next 30 years. Like any market, property prices depend on supply and demand. Supply can be guessed, but demand is impossible to predict. Would you like to buy a nice house in Detroit for $1000? Me neither.
Not only cities or countries could be hit by crisis or natural disasters but on top of that, property is highly taxed, high maintenance, and very illiquid. In general I would not recommend investing in real-state.
Buy to let could be a better choice but again, it’s a very long game. You won’t be able to make money on it until the mortgage has been paid off and that’s usually 20 to 30 years. You have to be lucky with the tenants and the tax you pay can be increased at any time for no other reason than government thirst. Unless you manage you buy very cheap in upcoming areas, it’s very risky.
Gold, Silver, Cryptocurrencies. These are very risky as they have no intrinsic value but at least they are very liquid and volatile. These are decentralized and don’t depend on a central bank or the Fed to manipulate the price, which is good.
Municipal Bonds and similar products are very safe although the yield is low.
The best investment advice I’ve ever heard is Taleb’s barbell strategy: Invest 10% of your capital in high-risk investments like bitcoin, and the rest in bonds. Avoid the middle of the road choices.
The only investment 100% guaranteed: You
All the money, time and energy that you invest in yourself has a guaranteed return. The rest is just promises.
Learn valuable skills, become an entrepreneur, start side businesses, create passive sources of income, find what you love and keep doing it until the end. There are many activities you can keep doing until a very advanced age, just make sure you choose something that you love and keep learning until you become great. Writers, musicians, artists, entrepreneurs never retire. Why would they, when they love what they do? Do the same.
The best retirement is no retirement
To cultivate your entrepreneurial mindset is the best investment. You can fail 1 or 10 times, you will lose money, but that would be money well spent. What you learn, will make you survive and thrive in any situation.
So, stop worrying about your pension and start working for yourself.