Do you thoroughly plan your own future not only reflecting your desire or intention to achieve a specific goal but literally writing key steps on paper along the way? Even a simple mini-survey of contacts will show that it is far from common for everyone to think through the stages of life for the future beyond three to five years. The vision of future is often blurry enough and comes down more to hope than to expectation that it will be possible to ensure well-being for oneself and loved ones.
It is not necessary to be an outstanding visionary in order to predict a change in the basic, milestone stages of life. Getting an education, building a career, acquiring housing, creating a family, raising and educating children and preparing for legacy transfer, any of these events may well become a subject of planning, allows setting clear financial goals and taking early measures to achieve them.
The task on creation of personal retirement savings deserves special attention because of the fact that, although it has the most long-term character, it is preferable to start solving it as soon as possible. Foreign practice shows that the creation of such targeted savings from a young age is not only realistic, but can also become a common model of behavior, especially if there is a culture of long-term investment and availability of convenient tools.
What options for planning future incomes can be recommended precisely in Russian realities? Let us outline a potential scenario using the examples of two generations: in the first case it will be a millennial at the age of 23 to 30 years, in the second - a person who is now from 40 to 50.
The Millennial revenues, most likely, did not reach maximums: according to Rosstat, the peak in our country falls on the period from 30 to 34 years. Substantial expenses are expected, in particular for housing and car purchase, and life goals are still quite vague and uncertain. In this context, a short-term planning for one to three years is of priority which should be combined with a long-term planning, with the horizon for 30–40 years (why, we will discuss below).
The situation with the second character is overall more certain: the level of income and expenses has settled down; and the experience in forecasting personal and family financial flows has been accumulated. Besides, there are relatively long period of labor activity and the possibility of regular credits of one’s savings. In this case, the financial planning for a period of 10-15 years can be considered as priority.
The representatives of both generations can accumulate available funds by distributing them between the personal budget items in one or another ratio. The experts of Fidelity Company, one of the leaders in the global asset management industry, offer the following universal formula: try to allocate no more than 50% for the current expenses, save 15% for retirement, leave another 5% for so-called unplanned purchases. The remaining 30% of income is also advisable to save for medium-term goals mostly.
How was that 15% obtained, which in our context seemed to be the most interesting element of the formula? It is believed that a level of income upon retirement comfortable for almost any person should be at least about 50% from the initial indicator. The latter should include not only a fixed salary, but also other direct and indirect benefits: bonuses, annual bonuses, and maybe even the most expensive components of the social package from the employer.
Apparently, the payments above the indicated level are not always achieved within the framework of the state support system. Based on its parameters in a particular country, including those predicted, it is possible, by calculations, to approximately estimate the share of income of a working person, which should be regularly directed to replenish their own long-term savings. In the USA, these are 15% (before tax). According to our assessment it is quite possible for the average Russian citizen to consider the level of 10% as a guideline given the traditionally more tangible participation of the state in basic pension provision.
Sticking to the recommended proportion and observing the regularity of deductibles, the millenials from the example in question guarantee a decent standard of living in the future for 30–40 years without departing too much from the usual cost model. The sooner you start saving, the more comfortable your way to the big goal is, besides, you have the opportunity to realize into practice the idea of an early voluntary retirement. The millennials have enough time left to create a reliable groundwork and if wished, to really begin a new stage of life in a period chosen independently.
The older generation representatives do not have a time leeway, therefore, it is more difficult to accumulate acceptable capital: the amount of contributions should be higher, the instruments used should be more conservative, despite the fact that the focus on obtaining returns at least above inflation remains. Opening a deposit is not the best option for these purposes, especially in the era of low rates, as it is now.
During the investment industry evolution in the West various tools have been developed to fine-tune the savings strategy to the profile of a particular client. There is also a fairly wide selection of options for these purposes in Russia, for example, non-state pension fund programs, endowment life insurance, or individual investment accounts (IIA). The latter are characterized by transparency, good variability of the risk and profitability balance, ease of use, and most importantly - the presence of a powerful tax incentive, which increases the attractiveness of formation of any savings for a period from three years.
Let me remind you that the state provides a 13-percent tax deduction for amount of up to 400,000 rubles per year, placed to IIA. In fact, it is possible to receive up to 52,000 rubles of income only for replenishment of an account, investment of which along with fixed assets will additionally increase the final financial result. If more than 10-12 years are left before reaching your goal and possibility to spend the accumulated amount, a “B” type investment account is even more beneficial, as it completely exempts from taxes not down payments, but investment incomes.
When opening an IIA in a bank or brokerage company, it is necessary to independently compile and periodically balance the security portfolio which requires time and a certain level of preparation. An alternative is an investment account in a management company with a choice of a ready-made investment strategy that the professional portfolio managers are responsible for.
Conservative strategies are based on investment in bonds, and more aggressive ones - primarily in stocks. Foreign financial experts advise sometimes to walk a rule when distributing the proportions in a personal "pension" portfolio: 100 - person's age = share of stocks. Thus, at the age of 30 about 70% of investments can be in shares, the rest in fixed income instruments, and by the age of 50 the ratio should already be one to one. We would like to recommend adding a lowering coefficient to this equation: say, subtract not from 100, but 80. Thus, at the age of 30 the aggressive part of the portfolio will be 50%, at 50 - 30% in Russia, as an emerging market with a high volatility stock market.
We recently conducted a rather detailed survey among customers, the topic of which was an assessment of interest in long-term savings in the individual investment account (IIA). The share of people who expressed their willingness to purchase such a product exceeded 50%, and the greatest interest was shown by representatives of generation X - people aged 40 to 55 years. About 40% of respondents admit the option of transferring 8-10% of their regular income to the investment account, while 53% could send for these purposes more than 350,000 rubles annually.
The responses of the self-employed as the potentially most vulnerable group in terms of mandatory pension benefits were of particular interest. The average estimate of an acceptable annual contribution to the IIA was less than 14,000 rubles per month (160,000 rubles a year) in this sample. It is possible to accumulate more than 1.5 million rubles in the account for 10 years, which together with interest earned and the tax deduction effect will provide a certain current income replacement ratio in the future.
Let us go back to such a component of the recommended personal budget allocation formula as savings on unplanned purchases. A disease, job loss or other emergency situation may require a financial mobilization and involvement of a personal stabilization fund. Its size, in accordance with the recommendation, should cover at least three to six standard monthly expenses, i.e. be equal to one and a half to three monthly incomes. The deduction of 5% of the current salary for these purposes seems quite easily done and involves the creation of an adequate safety net for several years.
What assets is it advisable to keep short-term savings in? Since the access to them may be required as a result of extraordinary, unpredictable circumstances, the liquidity factor comes to the fore. It is possible to additionally use exchange-traded mutual funds for profitability increase and better investment diversity along with savings accounts and short-term deposits, more conventional options. This is one of the most liquid investment tools allowing participate in the dynamics of the markets with the option of prompt fund withdrawal without significant charges.
By expanding the planning horizon and accumulating savings of various terms for future goals, you will provide yourself with more confidence in the future. The opportunity for further financial well-being will be guaranteed not so much by the state as the results of your personal “pension reform”.
Photos are from open sources.