How do you prepare financially for a longer life?
June 29, 2023
5 minutes to read
Belgian women who were born in 1885 had a life expectancy of 46.6 years according to Statbel. Men had to make do with 43.6 years (imagine entering your mid-life crisis at the age of 21). Fast forward to today and our life expectancy has rocketed. If you have a baby girl today, her life expectancy is 84.6 years. If you have a son, his average life expectancy is 80.3 years. That is a 38 and 36.7 year gain respectively in less than 140 years. In addition, our life expectancy is still expected to increase slightly in the coming decades. Another striking statistic? According to the UN, our planet had around 20,000 centenarians in 1960. By 2060, there will be almost 5.5 million … Of course, it’s not just quantity that counts, so what about quality of life? We not only live longer; we also are also healthier and more comfortable. This is great news. However, it also means that we need to think about how we can financially manage those extra years well in advance. There is actually an extra reason to take care of these things yourself: Belgium's pension expenditure is rising and it is not certain that there will always be a budgetary scope to provide everyone with a proper pension. One of the reasons is the shrinking active population: as the number of retired people increases, there are fewer and fewer people supporting public pensions. According to Statbel, there were 435 Belgians of working age for every 100 pensioners in 2000. By 2050, there will only be 253 for every 100. So to be on the safe side, it’s best to build a nest egg yourself. Another reason is that according to OECD, the average pension in Belgium is 38.1% lower than the final net salary. And this may be even more pertinent if you are a woman. There are two reasons for this. On average, women live a few years longer than men. And they also earn less on average: according to Securex, in 2022 women’s gross salaries were around EUR 8,764 less than men's, which means that their average pension is also lower.
What can you do?
1. It all starts with a plan
Planning for the future starts with a thorough overview of your current financial situation, your expected financial situation and your future goals. By drawing up a plan, you can see whether your expected and desired financial situations are in line (spoiler alert: Belgians tend to overestimate their pension income). Such a plan should give the ultimate answer to the question: what will I need in the future and what do I need to do now to achieve that goal? Creating an overview of all your current finances – your income, debts, savings, financial investments, expenses – is probably the easiest step. Projecting your expected financial situation is a more difficult task. After all, no one can predict with certainty what their financial, professional or family situation is going to be in the future. Or what the world will be like for that matter. Factors such as your career, the size of an inheritance and the level of inflation are all difficult to predict in the long term. However, the income from your state and private pensions, the repayments of any outstanding loans, your children's higher education costs and your future income from savings or other financial investments are all things you can predict with some certainty. So make sure to do this exercise in order to arrive at a (basic) plan, which you can then adjust and refine every so many years. When you draw up your plan, also take into account any expenses that will change after your retirement, for example more travel or the purchase of a second home. To give yourself a bit of a buffer, you should also assume that you and/or your partner are likely to grow older than you expect, and that your health care costs will also increase as you get older. The average health expenditure of people aged 85 and over is six times higher than of people aged 55 to 59. If you are convinced of the benefits of a financial plan, but reluctant to put together a plan yourself on a spreadsheet or piece of paper, you can also use certain apps and online calculation modules to get the job done (search for 'financial plan'). Another solution is to contact a financial planner. These experts have the tools to calculate exactly what you will need later on, taking into account your family situation, objectives, inflation, inheritance planning, etc. No matter how you set up your plan, remember that it is a dynamic document that you should evaluate and adjust each year.
2. Increase your monthly pension income
In addition to your statutory pension, you may contribute to a (lump-sum) supplementary pension via your employer, a voluntary supplementary pension scheme for the self-employed (PLCI/VAPZ) or a life insurance pension scheme for company directors (EIP/IPT). You may also have pension savings as a retirement nest egg. However, unless you are getting a generous civil servant pension, it is very unlikely that this will be enough to live on comfortably for decades to come. There is a good chance that you will have to dip into your reserves to maintain your standard of living. The latest Statbel figures show that pensioners spent around EUR 1,660 per month on goods and services in 2020. For households with at least two family members, the combined expenditure amounted to about EUR 2,650 per month. Of course, these averages may conceal large differences. Taking into account inflation in recent years, we should add roughly 15% to these amounts (arriving at EUR 1,910 for singles and EUR 3,050 for retired couples, respectively). There is therefore a real chance that your state and private pensions will not be enough to cover your expenses with room for the odd treat.
This is how you can create a war chest for the future:
- Financial investments Although financial investments carry certain risks, they do offer a higher potential return than savings in the long term. It is important to diversify your financial investments to limit the risks. If you have little or no financial investment experience, a periodic investment plan may be a good solution. Financial investments can also generate a regular income. For instance, you may receive dividends from shares or coupons from bonds. Your choice of financial investments should also take into account rising life expectancy. Living longer also means a longer investment horizon. Consequently, you could invest more dynamically if that is in line with your risk appetite. For example, you could focus your investments more on shares than on bonds.
- Savings Savings remain one of the most traditional and safe ways to build wealth. Pension savings can be an option, especially if you can't or don't want to take more risks. However, you must accept that inflation is likely to erode the purchasing power of your savings in the long term. Branch 21 and 23 life insurance policies are alternatives that may offer prospects of a higher return. They allow you to invest or save your money and protect your loved ones at the same time. You can leave the money to them in the event of your death.
- Property investments One type of property investment is to purchase a buy-to-let property and receive rent as a source of income. Or you can invest in a property to renovate it or to rent it out for a few years and then sell it for a profit. Real estate can be a good investment because it has the potential to rise in value and generate a stable income stream. Property is often also inflation-resistant. However, bear in mind that, like any investment, there are risks involved. You are not always sure of a monthly income. Rental income or capital gains may also be taxed (more) in the future. You can alternatively or additionally also invest in listed real estate, if this is in line with the risks you can and want to take.
- Pension savings Start your pension savings as early as possible if you have not already done so. Pension savings allow you to build that nest egg. The government will boost your pension savings with tax relief.
- Consider working during retirement Retirement doesn't mean that you have to go from fifth gear straight to neutral. If you are at least 65 years old, or if you are not yet 65 years old but have already worked for 45 years, you can receive your full retirement pension and earn unlimited additional income. Do bear in mind that you will be taxed on that income.
3. Don't give too many of your assets away too soon
It’s a nice gesture to share some of your wealth with your children and other people or organisations you hold dear during your lifetime. The government has also made gifts more attractive for tax purposes than inheritance tax. One disadvantage of gifts, however, is that they are final. They can only be reversed in very exceptional circumstances. If you want to make a gift and you have made your calculations to make sure there you still have plenty left for yourself, it may still be a good idea to incorporate certain safety mechanisms. For example, you can give away a portfolio of shares that is subject to your usufruct. This means you continue to control and manage the gifted portfolio and you keep the income. For example, you can also gift a home, but continue to let it and receive the rent or continue to live there yourself. In addition to this usufruct option, you can also link other conditions, terms and/or charges to a gift. For instance, you can include a clause that says that the gifted goods will return to you if you end up living longer than the beneficiary. Your notary or another wealth expert can help you to set this up.
4. All together under one roof?
Finally, instead of living separately, you may also consider a multigenerational household. This certainly has its advantages, both financially and in terms of social interaction and care. You share the housing expenses and you can support each other in everyday life. However, it also has some disadvantages and is not right for everyone.