Your retirement is probably the most important financial goal you have. And for most people, it's also the goal they're least actively working toward. Yet starting to invest for retirement early can make the difference between living comfortably and having to cut back.
Why invest for retirement?
State pension and your employer pension together cover an average of about 70% of your last earned salary. For many people, that's not enough to maintain their standard of living. You need to bridge the gap yourself.
Saving is an option, but with current savings rates you lose purchasing power to inflation. Investing has historically offered higher returns. And with retirement, you have the greatest advantage there is: time.
The power of time
Compound growth (compound interest) is the most powerful concept in investing. Your returns generate returns of their own. The longer you let this process work, the greater the effect.
An example: if you start investing 200 euros per month at age 25 with an average annual return of 7%, you'll have over 525,000 euros by age 65. If you start at 35, that same amount will only grow to 245,000 euros. Starting ten years later costs you more than half of your final capital.
It's not about how much you invest, but how long.
How do you invest for retirement?
Determine your pension gap
Calculate how much you need on top of your state pension and employer pension. Websites like mijnpensioenoverzicht.nl provide insight into your accrued rights. The difference between what you'll receive and what you want is your pension gap.
Choose the right investment type
For retirement, diversification and consistency are more important than chasing high returns. Broad index ETFs such as an MSCI World or S&P 500 ETF are a logical foundation. Low costs, broad diversification, and you don't need to select individual stocks.
Invest automatically
Dollar-cost averaging is the ideal strategy for building retirement savings. Set up an automatic monthly investment and let compound growth do the work. No timing, no emotion, just discipline.
Adjust your risk as you get older
If you're 30 and retirement is 35 years away, you can take more risk. You have time to ride out market downturns. If you're 55 and retirement is 10 years away, you gradually shift toward safer investments.
A commonly used rule of thumb: the percentage of bonds in your portfolio equals your age. If you're 30, then 30% bonds and 70% stocks is a starting point. If you're 60, you reverse that ratio.
Tax advantages
In the Netherlands, you can arrange retirement savings in a tax-efficient way through:
- Annuity (lijfrente): contributions are deductible from your taxable income (if you have a pension shortfall). You pay tax upon payout, when you're typically in a lower tax bracket.
- Annual allowance and reserve allowance: the room you have to save in a tax-efficient manner. You can still use unused annual allowance from up to 7 years ago.
If you invest outside an annuity, your investment falls under box 3. Read more about this in the article on tax on investments.
Common mistakes
- Starting too late. Every month of delay costs you compound growth that you can never make up.
- Investing too conservatively at a young age. If your retirement is 30 years away, you can absorb market drops of 30 or 40%. Saving in a savings account yields less over that time horizon.
- Panic selling during a crash. Market crashes are part of the deal. Those who sold in 2008 and never came back missed one of the longest bull markets in history.
- Forgetting to rebalance. If stocks outperform bonds for years, your allocation shifts. Rebalance annually to keep your risk aligned with your horizon.
- Paying too high fees. A difference of 0.5% per year in management fees seems small, but over 30 years it costs you tens of thousands of euros.
Start now
It doesn't matter whether you're 25, 35, or 45. The best time to start was earlier. The second best time is now. Even small amounts grow into significant sums over long periods.
Want to know what type of investor you are and which approach suits you? Take the free investment quiz and discover your personal VECTOR profile.