Increasing your savings is undoubtedly very wise and you can become an investor at any age. Just remember that investing is related to your age because that is what your strategy for increasing your funds will depend on.
It is first and foremost about time. Investing largely depends on how long you have to do it. When starting at a younger age, there is obviously more time to save money than when starting at an older age. However, this does not mean older people have missed their chance – when you are smart about it, you can still grow your assets without issues.
The easiest way to invest is to do so by saving for your pension. This sounds strange because you would not consider saving for your pension as investing. Putting your money in real estate, stocks, and bonds seems more like an investment, but in reality, pension funds contain just these things.
One very simple fact speaks in favour of saving for your pension. If you want to live a comfortable life as a pensioner, you should think about your finances and act accordingly for decades before retiring. Namely, the state social welfare offers future pensioners, i.e. the working people of today, a monthly pension, the purchasing power of which will be smaller in the future than today. Why so? The amount of the pension clearly depends on the taxes paid by the working-age population, i.e. our children and grandchildren, but the number of employees (taxpayers) is decreasing every year.
20+: use your time advantage
At 20, it seems that you have an infinitely long life ahead of you and thinking about retirement is the last thing you want to do. In fact, starting to invest at this age is the best thing you can do. This way, you can save for decades and the investment will survive market fluctuations without you having to worry too much even in difficult times. Time will be your best friend because it means that your money has time to grow.
By saving for your pension with the second pillar, the contribution of the state is also added: in addition to your 2% contribution, the state adds an additional 4% each month at the expense of social tax. The share of the state is 40 euros per month or 480 euros per year at a gross salary of 1,000 euros. Think of it this way – if you do not make contributions to your second pillar, your tax money will be redistributed in the state budget and over 10 years, you will lose 4,800 euros of your salary to the state budget. Furthermore – return on the selected investment is not taken into account here.
For a 20-year-old, we recommend the SEB Pension Fund 100 or the SEB Pension Fund Index 100 (second pillar) and the SEB Active Pension Fund (third pillar). However, if you prefer a pension investment account, you can choose the investments yourself. Young investors are more suited to higher-risk opportunities because time is on your side – even if the value of your assets falls, you have time to wait for a new rise.
35+: a great time to become an investor
Even at 35, retirement still seems to be a long way off. You have done a lot, but you will have a lot to achieve. You have probably started a family and worked hard. Many make major career changes during this time, such as learning a new profession.
If you have not bothered with investing before, now would be a good time to start. You can take advantage of the benefits that the state offers when saving for pension and make time work for you. You still have decades before retirement, which means your money has time to grow and you can afford a higher average risk with some caution. Even if a stock market crash strikes the world within a few years, you still have enough time to recover.
A good investment strategy at the age of 35+ would be that, in addition to equity funds, about a quarter of your investments are made up of less risky bond or real estate funds.
We recommend SEB products that invest 100% in shares or the SEB Energetic Pension Fund. It contains riskier shares and bonds and real estate to offset possible risks.
55+: time to enjoy your investments and keep growing money
At this age, life is far from over! On the contrary, you now have time – the children have grown up, the loans have been paid, and the most active years of work are probably behind you. Many people use their free time to start learning something truly close to their heart or fully commit to their hobby for which they did not have time before. Now is also a good time to review your finances, i.e. your investment strategy.
Even if you have a solid amount accumulated in the pension fund, it is not wise to withdraw it at once. Instead, use the funded pension option. The withdrawals are gradual and the assets are still invested. As the investment horizon is somewhat shorter, it is worth switching to a pension fund with less risky investments. If you are planning to open a pension investment account, it would be reasonable if, in addition to equity funds, the share of bond funds or other low-risk investments is at least half of the investment amount.
We recommend the SEB Progressive or the SEB Optimal Pension Fund in the second pillar and the SEB Balanced Pension Fund in the third pillar.
How much should I invest?
In the case of the second pillar, a 2% contribution from your gross salary is made for you. What to do with the rest of the money is completely up to you. A common objection of people to investing is that their salary does not allow them to do it – there is simply no money left to set aside! Remember that you can start with very small and affordable amounts. Putting aside ten euros a month is better than nothing. Why not place it in the third pension pillar and take advantage of the 20% income tax refund offered by the state? By adding ten euros to your third pension pillar each month, you will have 120 euros growing in a year and the state will pay you back 24 euros in income tax.
When investing, keep setting goals. Even if you started with small sums, you could aim to set aside a fifth of your salary every month. Another tip is to always pay yourself first – invest your money – and only then pay others, i.e. pay your bills, daily expenses, and taxes. By considering your other obligations and setting a suitable monthly amount to invest which you pay out immediately, you will not end up in a situation where there is no money left for investments.
All you have to do is start
Investing means that you create better chances for yourself in the future. When investing, you must take into account possible changes in the economy. Even if the current return is very good, it may change in the short term and possible future returns cannot unfortunately be predicted based on the past. The value of investments may increase or decrease and you should know your risk tolerance limit when investing. However, when saving money in the second and third pillars, you have time to let the changes take place and expect a new increase after the decline.
When starting to invest, you must think hard about your decision, be sure to read the terms and conditions, and, if necessary, consult with specialists. Do not postpone investing indefinitely because every year you do not start, you will lose money.
If investing and pensions still seems too complicated, contact us and our advisors will be happy to help you find the most suitable way to invest. We will be happy to answer all your questions. The fastest way to get your answers is to contact us.
Endriko Võrklaev
Fund Manager of AS SEB Varahaldus
