It is estimated that only one in three people have planned their retirement. Also, that seven out of ten people will need long-term care services at some point during that period, said Carlos López, Popular’s retirement planning specialist. Therefore, some people have left their health to chance. However, this doesn’t have to be the case.
“In Puerto Rico, typically, it was normal to start planning for retirement a year before retiring. Today, we face a very different reality that requires discipline and shifting to a long-term mindset to prepare properly. For this reason, at Popular we have launched multiple educational efforts over the years to support Puerto Ricans so they can be better informed and make better financial decisions. Our goal is to promote the social and economic well-being of our community”, said Juan Guerrero, Executive Vice President of Financial Services and Insurance at Banco Popular.
We only have one chance to plan our retirement. We must balance that planning with other priorities, commitments, and aspirations like buying a property, our children’s education or traveling the world. “It’s up to us to establish a timely retirement strategy,” López pointed out.
The earlier, the better!
Retirement occurs when we leave the workforce and lose our main source of income: our salary. For example, if a person expects to retire around the age of 65 and life expectancy is 85, we’re talking about 20 years without that money.
Thus, planning for retirement involves thinking about how we replace that income. It also involves considering:
- How to maintain your lifestyle? (but without your salary)
- How to calculate inflation? (since the cost of goods and services will be higher in the future than they currently are)
- How to make sure your needs will be covered? (from leisure activities to medical care)
- How to achieve all this for two decades without running out of assets?
According to López, studies suggest that retirement planning should begin at age 30; however, he encourages to start planning as soon as the person starts to generate an income.
“There is a belief that the amount of money you will need during retirement is lower, but that’s not the case. We must replace around 90% of our annual income. Since this is a high percentage, we must allocate 15% to 20% of our annual income to retirement”, López stated. To illustrate the point: if a person earns $30,000 a year, we’re talking between $4,500 (15%) and $6,000 (20%).
Hence the time factor: the earlier you start saving for retirement, the more comfortable contributions will be. And in the case of investment contributions, they could benefit from participating in the stock market for a long time (between 20 to 40 years). While there are no guarantees that this will happen, historically it has been observed that time has favored long-term investors, allowing them to overcome market swings, López said.
Options and strategies for your retirement
Financial institutions have products for planning your retirement. The most common are:
- Defined contribution plans
- Individual retirement accounts (IRA)
- Annuities (which work somewhat like Social Security)
- Life insurance
Defined contribution plans and IRAs, both offer these advantages:
- You can decide how much to contribute. These contributions are deducted from your tax liability, up to certain limits.
- You don’t pay taxes on the amounts while they are invested in retirement plans. In IRA accounts you could postpone taxation until it’s time to withdraw the money or pay on contributions and not on the money accumulated when you withdraw it if certain requirements are met. Each product has different tax characteristics that should be taken into consideration when making your choice.
- In defined contribution plans and IRAs tied to the stock market, you could benefit from returns (interest or value appreciation) that could be generated by the instruments chosen by you or your financial consultant.
The retirement date dilemma
Retiring after your originally scheduled date is not a problem; after all, with good planning, your finances should be ready by then. Retiring before your original date could pose a risk if you haven’t prepared for that possibility.
“More than half of the people leave the workforce earlier than expected. Most do it for family or health reasons. We think that the decision to retire is solely up to us and we don’t realize that there may be external factors that we can’t control,” López explained.
An earlier retirement, he said, means a longer period in which you must replace the salary that you used to earn, as well as reviewing the planning done to maximize profits and reduce investment losses.
A final matter, López added, is to avoid withdrawing money from retirement accounts earlier than expected because, in addition to reducing your retirement assets, it could have other repercussions such as having to pay taxes and not benefiting from the long-term interest and growth of those assets.
If you want to start your retirement strategy today, contact Popular’s team of experts at email@example.com.
The information and general descriptions found in this article are designed to help you understand some of the factors you should generally consider when evaluating the appropriateness of any strategy or investment within your retirement plan. Any description included is for informational and educational purposes and for your independent consideration only; it is not to be regarded or viewed as advice or as a suggestion to take (or refrain from taking) any particular action. By providing this information, we assume that you can evaluate this information and the general descriptions found here to exercise your independent judgment. Banco Popular de Puerto Rico, its subsidiaries and/or affiliates are not engaged in rendering legal, accounting or tax advice services. If legal, accounting, or tax advice services are required, you should seek the services of a competent professional. Insurance and investment products are not insured by the FDIC, they are not deposits or obligations of, nor are they guaranteed by Banco Popular, its subsidiaries and/or affiliates. Investment products may lose value. Some insurance products may lose their value.
Banco Popular de Puerto Rico offers numerous investment alternatives for IRA accounts. You can get detailed information at any of our branches to determine which investment alternative is best for you.