I don't want to alarm you unnecessarily, but if you haven't already, you should think seriously about your retirement. At least if you don't want to risk a drastic reduction in your standard of living. I summarize the terms of the matter in a few lines.
At the end of the working activity, those who have regularly paid the so-called "social security contributions" receive the compulsory pension from the responsible social security institution (INPS which, recently, has also incorporated INPDAP). Contributions paid by workers are used to pay pensions.
Just like in a good Ponzi scheme, the fresh money is not invested, but is used to pay off the old investors… and, as with all Ponzi schemes, the day of reckoning arrives: when there are no longer enough new entrants fresh money, the system… collapses!
This is exactly what could happen in Italy as a result of the worrying demographic dynamics of our population. The situation is well illustrated by the graph that I propose: the projection of the ratio between the population of retirement age and that of working age is drastically worsening in the coming decades. To say, with the current trend, i.e. assuming that there is no much "softer" immigration policy in the years to come, in 2052 around 60% of the Italian population will be elderly and will not work (keep in mind that the demographic , unlike economics, allows you to make decent forecasts).
The question of the questions is: how will 40% of the population earn enough to pay the pension to the remaining 60%?
Considering that the International Monetary Fund forecasts peaks in unemployment over the next five years, it is easy to understand that this "first pillar" of social security will be less and less capable of ensuring an adequate standard of living on its own: in short, the INPS may not be able to pay a pension acceptable to Italians! “No country for old men” to paraphrase the Coen brothers…
Moreover, this is a problem common to many other developed countries and therefore constitutes one of the most critical and dangerous variables for the current economic system as a whole. A factor of long-term instability.
The reasonably practicable ways to manage this situation are:
- retire later;
- extend the scope of private pensions, in practice save more.
This is exactly what most of the governments of the countries in which demography "rows against" are doing.
In Italy, workers can choose whether to allocate a part of their savings to building an additional income, by paying contributions to complementary pension schemes on a free and voluntary basis. The supplementary pension schemes are divided into two categories: i pension funds, closed or open ("second pillar" social security) i individual pension plans (the “third pillar”), or PIP, made through insurance policies.
Adherence to supplementary pension schemes is, rightly, subject to strong tax incentives and some employers undertake to pay a monthly contribution (usually calculated as a percentage of salary) in favor of the supplementary pension scheme to which the employee has decided to join, often on condition that the worker also pays a contribution at his own expense.
Furthermore, many closed-end pension funds, those reserved for workers who belong to a specific group (e.g. employees of a company or a group of companies, or belonging to a specific category) are managed with high professionalism by carefully selected managers, while presenting very low management costs which often make them attractive for the saver. So long story short, in many cases (not always) joining the supplementary pension scheme is convenient.
However, many workers do not have pension funds available, at least on convenient terms. If so, you can set up an investment portfolio for retirement purposes, which, however, can also constitute a further integration of the aforementioned social security forms. We could define it as "fourth pillar".
So let's talk about a portfolio, obviously not personalized but which can be a good example for this "fourth pillar".
- Form of incorporation: through gradual payments (PAC).
- Time horizon: at least 10 years, but also much more.
- Rebalancing: periodic adjustments of the asset allocation are foreseen over time (which will be published on this blog).
- Structure of the PIC portfolio: given the gradual nature of the payments, to make payments possible even for small amounts, the structure is optimized to bring together simplicity and the portfolio's ability to fulfill its tasks. Great attention is paid to containing the management costs (TER) of the portfolio.
- Number and type of financial instruments: going back to the previous point, the number of tools is really small, to make the portfolio accessible to a large number of savers. We have also used ETFs or funds which, compared to government bonds, have a low minimum denomination, to make periodic payments easier. Furthermore, the low cost of ownership (TER) of ETFs makes its beneficial effect felt in the long run.
- "Minimum cut" of the gradual payment over time (PAC): approximately 700 euros, obviously it is possible to invest multiples of this amount. The figure depends on the minimum denomination of the instruments in the portfolio.
- Frequency of periodic payments (PAC): monthly, bimonthly, quarterly or even half-yearly, depending on the saver's financial resources. Let me say something as I would say it to a friend: better to save little and gradually but methodically and regularly than to say to yourself "I can't do it". Often non-essential goods or services are purchased and significant waste is made: setting a substantial objective, such as the one associated with this portfolio, is an important step in building something solid and "cutting dry branches". So, I repeat, a payment every six months is better than abandoning the field.
- Logic underlying the wallet: diversification of the main long-term risk factors borne by the portfolio, i.e market risk (general), default risk of bond issuers included by ETFs, geo-political risk, risk of erosion from inflation.
- Composition: the portfolio therefore invests in the following factors/asset classes
- “Value” shares, from both developed and emerging countries, to focus on a reasonable equity risk premium, given the long time frame, as well as to acquire protection from inflation;
- a mutual fund on African equities, a continent that presents many risks but also great growth opportunities; the fund in question, despite having a higher TER than ETFs present on the same asset class, has an excellent Morningstar rating and, in our opinion, represents a better instrument to hedge this investment category;
- government bonds of developed countries, diversified on a global basis;
- inflation-linked euro area government bonds, to provide protection against inflation risk.
The wallet, which we called obj. CAP pension, and on which we will make simulated quarterly payments (on the occasion of which any changes in the composition will be made), is freely available on the Advise Only website.
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