Our goals are different at 20, 40 or 60 years old. Young adults will be looking to set up home and start building a nest egg, whereas retirees will want to maintain their standard of living and get their estate planning in order. Priorities change over time, and so do the financial means at our disposal. To help you make the right decisions at key moments in your life, myLIFE has a few tips on the best savings products to suit your stage of life.
Young professional: between 20 and 30 years old
Take José, for example. At the start of his working life, he wants to use his first payslips to enjoy himself: going for weekends away with friends, buying a new phone, kitting out his apartment, etc. Most of his money should be easily accessible.
But he shouldn’t forget to build some precautionary savings to cover any contingencies such as car repairs, a service charges reminder or a washing machine replacement.
He can use a safe and easy-access savings account for this. This type of investment gives him the flexibility to deposit and withdraw money at any time without restrictions. He can set up an automatic monthly transfer and save money without thinking about it. The earlier he starts, the less effort will be needed.
A part of the contributions and premiums paid into a mortgage savings account can be deducted from taxable income.
José is also hoping to buy a property in the coming years and he will need a capital contribution for this. Unfortunately, his parents didn’t do this for him when he was a child, so he’s thinking of opening a mortgage savings account. If he meets the criteria set by the government, he will then be able to take out a mortgage on advantageous terms to buy, construct or renovate his home. What’s more, part of the contributions and premiums paid into this type of product can be deducted from taxable income.
Adults: between 30 and 50 years old
As he reaches his thirties, José and his wife buy a house. They are expecting their first child. He’s thought about taking out a real estate loan early enough, so he won’t still be repaying it when he retires. He also plans to take out mortgage insurance to cover this loan and protect his family. With a baby on the way, José’s thoughts have turned to family and his long-term goals. He is therefore looking for investment and savings schemes that meet his objectives and wants to invest in a savings scheme to prepare for his baby’s future.
He could take out a life insurance policy which will enable him to save regularly and generate returns that will mainly depend on the level of risk he is prepared to accept. This will also secure the financial security of José’s family should he die and is linked to certain tax advantages for the term of the policy providing that certain conditions are met.
Although retirement may seem a long way off, he can also start to build an additional source of income to his pension. He has the good luck to have an employer who will contribute to an occupational pension scheme. José tops this up with personal contributions that are tax-deductible. Of course, these advantages depend on the legislation in force, which can change over time, as can the personal situation of each of us.
He could also take out a retirement savings scheme with a bank or insurance company. With this type of product, José can choose how his contributions are invested – in safe or higher risk investments – and will enjoy tax benefits for the duration of the scheme (minimum 10 years). Upon retirement, he will receive a lump sum or monthly annuity, or a combination of the two.
Long-term financial investments are a good way to limit risk while maximising his chances of optimising returns.
After a few years José may also start to think about growing his assets. His income is higher than at the start of his career and so he can diversify his investments gradually. There are many ways of creating capital – long-term financial investments are a good way to limit risk whilst maximising his chances of optimising returns: equities, bonds, SICAVs, structured products, etc.
José could also invest in bricks and mortar and consider buying a rental investment or second home. The rent he receives or money from the sale of the property will top up his income nicely. His banking adviser can help him set up a suitable financial plan to meet his objectives, profile and risk appetite.
The investment pyramid
Whilst precautionary savings are essential for dealing with contingencies, it’s not appropriate for José to leave all of his savings on accounts with such a low or negligible return. If the inflation rate is higher than that of your savings account, inflation will erode the value of your money.
That’s why it’s advisable to have several types of medium and long-term investments: a savings account, life insurance, retirement savings plan, financial products, etc. The key is to find the right balance between safe investments with a low return and riskier investments that are generally more lucrative over the long term. To gain a better understanding of this principle, take a look at the investment pyramid.
Approaching retirement: between 50 and 65 years old
The children have grown up and José will soon have repaid his mortgage. He has a comfortable level of earnings and wants to use his money to help his children and repay his outstanding loans. Now’s the time for him to start planning seriously for his retirement.
It isn’t too late to take out a life insurance policy or a retirement savings plan or to think about buying a rental property.
With the help of an asset manager, he can review his different investments and adjust these to ensure that his future income will be in line with his expectations. Savings schemes are still widespread at his age and it isn’t too late to take out a life insurance policy or retirement savings plan or to think about buying a rental property if he hasn’t already done so. If he gets the right support and expert advice, José can also continue to diversify his financial investments into alternative investments or luxury goods items.
However, the older he gets, the better it is to reduce exposure to risk and gradually opt for safer products that will help to maintain his standard of living.
Retired: over 65 years old
José can now enjoy his well-earned retirement. New hobbies, travel, giving his children a financial leg-up: his pension and savings give him peace of mind. The time has therefore come to start his estate planning and consider the various options available to him to provide for his family’s future.
Once again, life insurance offers an interesting tool that facilitates the transfer of an estate, particularly to non-family members.
Gifts or divided ownership (transfer of the bare ownership) may also be an attractive option financially. Gift tax may sometimes be lower than estate duty, depending on the degree of kinship. In certain specific circumstances in Luxembourg, a gift does not require registration by a notary meaning that there are therefore no costs for the beneficiary. This may be worth checking. José can take advice on how to safeguard his interests and those of his family by consulting an expert on estate planning.
This article covers a few ideas on how to optimise your savings depending on your age. If, like José, you hope to find the solutions that best suit your profile, you can’t beat the advice of a specialist. They will inform you of the various investment solutions offered by banks that match your profile, and of the tax and legal implications of your decisions. Over to you!