Retirement? Start saving now! - December 24, 2017
Consciously planning your retirement is more important than ever before: most pension systems are facing a crisis globally. The main reason is simple: life expectancy is higher and the systems were not designed for people living so long.
“We are living much longer than what pension systems were designed for”, writes World Economic Forum (WEF) in their white paper. This can lead to a global crisis soon since pension systems were designed when people lived five to eight years on pension, but as life expectancy grew this number doubled or even tripled.
As they write: “Looking at life expectancy in 2015, we can see that pensioners are now living eight to 11 years longer – and in the case of Japan, a whopping 16 years longer.” This means that “pension systems are now having to pay benefits for two to three times longer than what they were designed for.” And this trend is not going to change as life expectancy will go even higher by 2050.
Other serious problems
But there are other serious problems. Not only life expectancy gets higher, but birth rates are slowing down, too. This means that less and less workers are going to support pensioners, or to put it simply: pension systems will need more money to more people while less workers will pay less and less.
We already have a pension gap but it may become even more serious (see above), which shows how much money is needed to make the system work versus how much they have. As World Economic Forum predicts it: “By 2050, the total gap is a predicted to be a staggering sum of $400 trillion – roughly five times the size of the global economy today.”
A truly global issue
There are many different pension systems around the world, some are purely state run, others are based on selfcare, while there are mixed systems too. However, ageing population is a global tendency just like higher life expectancy is, therefore these problems are global too.
In Russia, for example, there is a constant discussion about rising the (relatively low) age of retirement, but it’s always postponed. According to Pension Funds Online’s outlook on Russia: “The public pension system will also suffer from the retiring baby boomer cohort, which will lead to a considerable pension deficit in the decades ahead. This will not be cushioned by the oil revenues that are currently suffering from historical low levels.”
WEF focused mostly on western countries in its paper, it’s easy to see how this truly is a global issue, as next to China, India will have to face the same problems. As we wrote some time ago, China also had to abandon its one child rule due to problems it caused. An ageing population not only leads to loss of workforce but to pension problems as well.
Want pension? Start saving!
Private savings may help a lot with retirement. As WEF puts it: “making saving easy for everyone” may help a lot with these system wide issues. It’s even more important since there is a serious shortfall on individual savings, according to the paper.
There is another crucial part of saving: you should start it as soon as possible or it can have serious consequences. In our post “How much money do you need for investing?” we quoted the famous author, Black Hodes’ lines: “If you invested $10,000 and left it to grow for 40 years, assuming an average return per year of 8%, you would end up with over $217,000. But if you waited 10 years and invested $20,000 — twice as much — you would only end up with just over $200,000.”
Therefore, planning a retirement in advance really can help a lot. Especially when pension systems are facing a global crisis.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.