Step 45: Calculate your Desired Pension

Step 45: Calculate your desired pension
Step 45: Calculate your desired pension

Although it is nearly impossible to predict how your pension will develop over time and how much pension schemes will change, especially if you are still many years, if not decades, away from your retirement, calculating your pension regularly and setting pension goals is a key habit to develop and establish if you don’t want to be taken by surprise when you finally get to retirement age and start needing to rely on your pension.

It’s easy to think that our pensions will work their way out for us and that we will be able to retire comfortably after 40 or 45 or even 50 years of working. Yet with fewer and fewer young people carrying the burden of paying for an ever-increasing aging population, not just in numbers but also in years living after retirement as saw in step 42, we don’t know exactly how the pensions will develop. Already many countries are increasing retirement age and this might happen again in a decade a two. 

So knowing where you are in terms of your pension, no matter how far away in the  future this might seem, is important and indeed essential to allow you to get as close to your goal as possible, make any corrections along the way that are needed and to avoid being taken by unpleasant surprises by the time you retire. Most of all it is important to realize that pensions aren’t as guaranteed as they once were and especially the way they might develop in the future is uncertain, so the only way to take full control over your future finances is by deciding on a pension plan and taking the necessary steps now.

You might think you can do with less money by the time you retire, what with not having any work related expenses such as travel and work clothes costs, your mortgage having been paid off, your children no longer needing any financial support etc. But the truth is, being retired is more expensive than you probably think. Look at people around you who you know are retired or ask friends about their retired parents and what they do. Now that they no longer work, chances are they suddenly have plenty of time to do other things, be that taking golf classes, going on walking trips, or maybe spending a lot of time with their children and grandchildren who live further away. Or even if they live close by, they probably take them out for trips or meals and buy presents regularly.

When you have a lot of time available you also have a lot of things you might want to pursue, as the time that you once filled with work and travelling to and from work, suddenly becomes available to do all the other things you never had time for. In case you have forgotten, have another look at step 31 on how lifestyle inflation and changing demands make scaling down over time very difficult indeed.

Step 45 – Calculate your pension – in detail:

  • Your current pension might tell you your projected annual income by the time you retire, so pull out your latest statement for any personal and / or occupational pensions you have.
  • Decide on how much you think you might need as an annual income once you are retired. Start with your current annual income and decide on how much more or less you need. Remember that even if regular expenses such as a mortgage and work related travel costs no longer exist, you likely will have other expenses replacing these, so it is wise to work off a figure close to your current annual needs.
  • Let’s say you think you need €30.000 a year to live comfortably. Bear in mind that inflation would take the value of this €30.000 down, so don’t see the €30.000 as a fixed amount. If you are 30 now and you work off a 3% inflation rate a year, those €30.000 will really need to be almost €90.000 when you are 67 in order to have the same buying power as €30.000 these days!
  • Analyze whether you are on track or not and what you can do now in order to get closer to your pension goal. Remember that even if you can only set aside a small amount now, this will still be better than big amounts later on. Time is the biggest wealth accelerator, compounding does the work for you.
  • Alternatively to a monthly income as we saw before when it comes to taking out your pension, you can decide whether to take out a lump sum. In many cases if you decide to take a lump sum, you might be entitled to a certain percentage being taken out without any income taxes. Find out the current regulations in terms of taking out a lump sum free of tax charges.
  • Find out tax rates for any amounts higher than the tax-free limit: how much is it and does it change depending on tax brackets? Remember that if you take out the full amount you are likely to be taxed in a much higher tax bracket than if you take out a monthly income, as your taxes are calculated over a yearly income, i.e. amount taken out in this case.
  • Taking out a lump sum might or might not suit your needs and personal situation, so make sure you are aware of details of all the options each pension provider offers.
  • Do you need to invest more in your occupational pension scheme? Do you need to open a personal pension scheme? How much extra would you need to pay into a scheme monthly in order to get on track? Which of the options you have investigated let you do this?
  • Compare the various pension plans now that you know how much extra you want to start saving and decide on the best way to achieve this for you. Take the necessary steps now (opening a new account, budgeting for the extra amount, talking to your significant other, speaking to a financial advisor if needed or your company’s accountancy department).
  • Get started and work towards a secure financial future now!

Here ends the 5-step series on pensions. I hope I was able to break down pensions enough to make them more understandable and actionable. Of course pensions are complex, and every state or country has their own systems, taxes and regulations, so make sure to inform yourself thoroughly. By now you should at least master the basics of pensions to make educated decisions about your own pension. Once you start you’ll find you’ll learn more and become more proficient in the language of pensions. The most important step you can take now is to just start.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

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