The day when you stop working, it can come as a minor shock to many how the monthly income is drastically reduced. It is no secret that it can be tough financially as a pensioner if you have not saved on your own during working life. In addition, there has been a downward trend for pensions lately – the more the population grows and the older we get, the more it costs the state. For many occupational groups, this has meant a marked reduction in the pension. Therefore, it is more important than ever to keep track of your choices when it comes to retirement savings, and how you can best ensure that the economy does not become a problem when you stop working. It doesn’t have to be difficult – start with being informed!
Where does the pension come from?
The pension normally consists of three parts;
- General pension
- Private pension savings
If you work or live in Sweden, the General Pension is something that the Pensions Authority saves for you and is also responsible for. How much is saved depends entirely on how much you earn or receive in compensation. When you work, 16% of your income goes to the income pension , which is the largest part of the general pension. In addition to the income pension, 2.5% of your income is deducted from a so-called premium pension . This you can choose to invest in funds or leave in the default funds selected by the state.
In addition to the general pension, most employers choose to pay occupational pensions. If you are employed within a municipality, county council or the state, it is a given that you receive occupational pension. The same applies if you are employed under a collective agreement. If you are employed without a collective agreement, then the employer does not have to pay occupational pension, and it is then important to have yourself and talk about it during wage negotiations. The occupational pension may be a large part of the pension in the end so the more years it is saved the better!
Private pension savings
By saving on your own during working life, you can have a huge impact on financial freedom during the retirement years. Normally, the general pension and the occupational pension will not provide as much ” monthly salary ” as you may be used to. With a downward trend in pensions, it can in the future be difficult to even achieve 50% of the previous salary through only the general pension and occupational pension. Then private saving becomes extra important if you want to maintain your standard of living.
How can I save on my own?
In recent years it has become more and more popular to save in the Investment Savings Account (ISK). With an ISK you save in funds, shares, securities and other financial products. Saving in an ISK requires some self-discipline as it is not possible to lock in the money or save with a payment plan. But it also means that you can decide on a monthly basis how much you want to save, what funds you want to save in and thus have a more active role in your pension savings.
When you save long-term with a capital insurance, you can choose a so-called traditional management as an alternative. This means that the insurance company manages the investment of one’s savings. In most cases, a capital insurance requires that you commit to saving for a certain amount of time. Normally, an annual fee is also deducted from the savings.
If your employer does not pay occupational pension or if you have your own company, IPS is an option to consider. With IPS you decide for yourself how you want to save; in funds, shares or securities and can switch funds at any time. However, your money will be tied up until you turn 55, after which they will be paid out for at least 5 years. It is important to remember that this type of savings will not benefit you if you already have an occupational pension as you will then be double taxed on your savings. Private pension insurance is a savings option if you do not have an occupational pension or are your own business. As with individual pension savings, this way is not advantageous if you already have occupational pension, as you will be double taxed on your savings. With a Private Pension Insurance you save through an insurance company and even here your money is tied until you turn 55 years old.
Of course, you can always save in a regular savings account, with or without interest – read more about savings accounts with interest here.
When to start retirement savings?
Since the saved money grows with interest every year, it can of course be more money in the end the sooner you start saving! As a young person, it can be difficult to motivate to start saving, but even a smaller sum each month can make a big difference after a few years. Skipping a dinner out or some coffee in town and adding to the pension are easy tricks to get it together. You can find more savings tips here!
Of course, one’s financial situation affects how early one can start saving, and how much. It is important, however, to get started with saving, and to remember that it is better to be flexible in how much you save than to quit completely when it feels difficult.
Saving with more than one of the above options can be a good idea. Choosing which way you want to save on your pension depends largely on what risk you want to take, and there are both pros and cons to most. A good first step when thinking about starting pension savings is to read more about the various alternatives, and choose the one that best suits your financial situation. Remember; the most important thing is to get started with saving!