Throughout your working life, you contribute part of your income to mandatory pension insurance. The question is whether one day your pension will be enough to feel calm and secure during the period of your golden years.

 

What income will be enough for you in retirement?

The starting point for answering this important question is the monthly employment income that you receive towards the end of your career. It allows you to maintain a certain standard of living. In order to have financial peace of mind/tranquility after you stop working, your pension will have to replace this income, if not completely, then to a significant extent.

Adequate levels in retirement are considered to be between 70 and 80 percent of the income during the last working years, i.e. this is the recommended gross income replacement rate – the ratio between the average pension and the average social security income.

In Bulgaria, under the State Social Security, in the medium term the gross replacement rate is expected to reach 56% and above, but in the long term – to drop to 43-44%. Of course, these are estimated rates that are average values ​​and cannot be applied at an individual level.

When making the assessment, it is a good idea to take into account the expected change in your lifestyle and the structure of expenses. For example, allocating more funds for healthcare.

 

How to ensure the desired retirement income?

To get an approximate idea of ​​the income replacement rate, it is important to understand what pensions you would receive from the first two pillars – the State Social Security and the Supplementary Mandatory Pension Insurance (SMPI). This will clarify what additional funds you need to accumulate to achieve your desired retirement income.

The problem is that this assessment will be most accurate just before retirement, when it will be too late to prepare and follow your retirement plan. Of course, there is a solution – to start building and implementing it at the beginning of your working career. Since it is a question of long-term planning, it is advisable to review your strategy annually and adapt it to what has been achieved so far and to current financial, legislative, tax and life realities.

Financial security for the retirement period is the most long-term financial goal that is wise to set at the beginning of your career path. The ways to achieve it are based on various strategies through investments in financial and other instruments (see the article „Types of investments“). Investment properties are an easy-to-understand alternative, but the purchase of such property is usually overwhelming in the early career phase.

 

When it comes to a retirement goal, the life cycle strategy can serve as a guide.

•         Between 20 and 40 years of age

In this period, young people begin their working careers. The long-term horizon before the goal – 30 – 40 years, provides an opportunity for investments with a higher expected return and taking on higher risk. During this period, it is logical to start the investment process with small amounts and regularly, with all the resulting profitability also being invested in order to maximize the effects. As income increases, it is advisable to increase the amount of funds intended for investments.

•         Between 40 and 60 years of age

Most often, these are the years of career heyday. Although each situation is individual, it can be assumed that incomes have reached higher levels. During this period, you should concentrate on the stable construction of your retirement portfolio. As you approach pre-retirement age, it is a good idea to make a comprehensive review of the distribution of your assets in relation to the approach to the goal.

•         Over 60 years of age

This is the period in which the retirement goal is approaching, and it is time to change the investment strategy and adapt the portfolio in order to minimize risks. Upon reaching the age at which you will stop working - most often this is the legally defined one, the consumption phase begins, i.e. the conversion of assets into money. Then security comes to the fore. The reason is that your capacity to overcome market fluctuations or losses is greatly reduced due to your limited time horizon.

 

It is a matter of individual decision what instruments to rely on at the different stages of the life cycle to accumulate funds for the retirement period. The possibilities are numerous - from insurance in a voluntary pension fund (see the article „Prospects for a higher pension“), mixed life insurance (see the article „Life insurance“), classic investments - in real estate and/or financial instruments, or in various alternative investments (see the article „Types of investments“). By transforming the accumulated assets into money, you can provide additional means for consumption that can supplement your disposable income to the desired levels.