Over the past year and a half, clients have increasingly come to me with the question: “I have to retire in ten years. What to do?”. Many people think it’s too late and therefore do nothing. However, ten years before retirement is not so short. That’s ten years, not all. Even at 50, it’s not too late to start taking care of passive income.
What is the best way to prepare for retirement?
No matter how much time you have until retirement, 10, 20 or 30 years, the following rules will always be relevant.
- Improve your financial literacy.This is necessary in order to use each ruble as efficiently as possible. What you need to know:
- how to protect yourself from scammers;
- how to get rid of unexpected expenses;
- how to reduce impulsive buying;
- how to maintain or improve the quality of life while reducing costs in order to save money;
- how to create an airbag, where to store it and what size it should be;
- where it is safe and profitable to keep money so that it does not depreciate.
- In the PFR personal account, make sure that you have taken into account all the places and periods of work and that you are entitled to receive an old-age insurance pension. To be appointed, three conditions must be met.
- Age: 60 for women and 65 for men. The increase in age requirements is taking place gradually: in 2022, women will retire at 56.5 years, men at 61.5.
- Insurance experience of at least 15 years. The increase in the requirements for seniority is taking place gradually: in 2022 it is 13 years and gradually, one year at a time, will increase to 15 years by 2024.
- 30 individual pension coefficients (IPRs), or points. The requirement for the presence of 30 coefficients is also introduced gradually: in 2022 – 23.4, followed by an annual increase of 2.4 until the specified value is reached by 2025.
- Make a personal financial plan .
Without a financial plan, nowhere, no matter how old you are. Otherwise, you simply will not see how achievable your goals are and where you are going.
A financial plan is essential, even if right now you think retirement is your only goal. As a rule, this is not the case. And, if you start saving for retirement as your only goal, you will inevitably have unexpected expenses that will ruin your entire plan. Because you will either get into the money set aside for retirement, or you will not save for a while. In any of the cases, then it will be necessary to increase the amount of monthly pension contributions or the required amount will not be accumulated. And the motivation to follow the plan will be lost.
To create a financial plan, you need to decide on your financial goals, timelines, priorities and opportunities, including how much capital you need to accumulate in order to receive the desired passive income. Will it be a full-fledged capital, which will allow not to depend on the state pension, or just an increase in the old-age pension? Both options are good, since any savings is better than nothing.
Goal Cost Calculator .
You can read more about this in the article “How to create a personal financial plan?”.
- Pay off loans and close credit cards, as they take extra money. In particular, it is necessary to calculate whether it is worth repaying loans ahead of schedule.
If you have a credit card, it is better to direct all free money to pay it off as soon as possible. This is due to the fact that credit card rates are noticeably higher than conventional loans, and quick repayment will minimize the overpayment.
What else determines whether early repayment of the loan is profitable ?
From how much time is left until the loan/mortgage is paid off.
- If less than a third of the term is left before the payment of the loan, you have already paid most of the interest to the bank, so early repayment will reduce the overpayment insignificantly. So you can send all the free money to the airbag and / or invest.
- If there is still a long time before the loan is repaid, a situation may occur when there is not enough money. For example, there were unforeseen expenses or interruptions in income (delayed wages, dismissed, and so on). Therefore, it is important to have a safety cushion so that in case of problems there is money both for life and for loan payments. It is possible that you are now paying the loan on schedule, and all the free money is directed to creating a cushion until you accumulate an amount in the amount of one to three months of expenses. Then you send all free money for early repayment, after which you accumulate on a pillow of the right size.
From the loan rate.
- If the interest rate on the loan is higher than the interest that you can receive on the deposit / investment, then it is usually more profitable to repay ahead of schedule. For example, the loan rate is 17%, and you can only invest at 10%. In this case, early repayment of the loan is more profitable. Except for the case when less than a third of the term is left before its repayment.
- If the loan rate is lower than the interest that you can get on investing, it is more profitable to invest free money. For example, you have a mortgage at 6%, and you can invest money at 10%. In this case, it is more profitable NOT to extinguish the mortgage ahead of schedule.
- Create an airbag if it doesn’t already exist.An airbag is needed for at least six months of fixed expenses. It is useful in case of unforeseen expenses, so that you do not have to withdraw money intended for other purposes. It may not always be profitable and fast. It is important that the airbag is easily accessible. Therefore, you can store it only on a deposit or a savings account in a bank. Also, part of the pillow can be kept at home. Keeping in bonds, money market funds, and even more so in stocks is not worth it. If only because the exchange does not work on weekends and you will not be able to quickly sell securities and withdraw them. Also, the withdrawal may take a couple of days, since first the money from the sale of securities is credited to the brokerage account, and then they must be transferred to the bank account.
- Understand investing.
- It is necessary. It is impossible to save up for retirement with the help of a deposit, the money set aside will be eaten up by inflation, because deposit rates are usually approximately equal to the level of inflation or even slightly behind it.
- It’s not as difficult as it seems. A passive portfolio investment strategy might be right for you. According to it, you do not need to select and analyze individual companies, follow charts and economic news. All you have to do is decide what percentage of stocks, bonds and gold you should have in your portfolio and buy stock and bond funds. The funds include securities of a large number of companies at once, which reduces the risk of bankruptcy of an individual company. So, by purchasing one share of the fund, you can buy shares of all the largest companies in Russia or the USA, as well as other countries at once.
- This does not require big money. They often write that you can start with 1000 rubles. per month. But in fact, you can start even with 10 rubles. – in many cases, the cost of one share of the fund is deliberately made small so that anyone can buy it. At the same time, the cost of one share of the fund does not affect its quality. The difference between the fund for 10 rubles. and conditionally for 1000 rubles. only that in the fund for 10 rubles. the share of the same companies is 100 times smaller. That is, it makes no difference if you buy one share of the fund for 1000 rubles. or 100 shares for 10 rubles. If you think that investing 1000 rubles. per month is useless, read the article “What happens if you invest 1000 rubles per month?”.
How to invest? To do this, you need to open an individual investment account (IIA) with a broker. This is a special brokerage account with tax benefits. There are two types of benefits:
- deduction for contributions (type A) – the ability to receive a personal income tax refund up to 52,000 rubles. Can be received annually (subject to annual replenishment of the account);
- income deduction (type B) – all profits will be exempt from taxation. Available at the time of closing (tax will not be taken from you).
Which type of deduction will be more profitable for you, you need to calculate individually . But if you have ten years or less before retirement and you are going to invest no more than 400,000 rubles annually, then type A will be more profitable, that is, the return of personal income tax. In order to use tax incentives, it is necessary that the IIS has existed for at least three years. You must be ready to invest money for at least this period.
- After you have completed all the previous steps, you can start saving and investing money in accordance with the plan you have created.
How much can you save in ten years?
Suppose that 10,000 rubles. – the amount of the monthly investment.
4% is the real return on a portfolio of stocks and bonds. We take the real yield, that is, the portfolio will grow by 4% above inflation. This figure is based on the historical performance of the stock and bond markets over 121 years.
RUB 1,477,406 – accumulated with interest for ten years. In fact, the amount on the account will be higher, but the purchasing power will be just that. That is, in ten years you will be able to buy goods and services for 1,477,406 rubles with the accumulated money.
Although small, but this capital will allow you to receive an increase in your pension.
Savings calculator .
What will happen if the pension is postponed, for example, by two years?
Due to additional deductions and compound interest, in twelve years you will already have 1,850,503 rubles. That is, in just two years, the accumulated amount will increase by a quarter, or by 373,000 rubles.
From 1,850,503 rubles. you will be able to receive passive income of 148,040 rubles. per year, or 12,336 rubles. per month, adjusted for inflation, which is a good addition to the pension.
Investing in 50 years is not only possible, but necessary. And if possible, it is better to start earlier – so due to compound interest you can save more.