The result of government and employer contributions, tax benefits and long-term appreciation of money (often over decades), additional retirement savings is one of the most used ways to improve your retirement.
Pension companies, in whose mutual funds a person invests money, offer a variety of investment strategies that affect the level of returns and thus the level of risk. Although the government no longer guarantees non-negative returns, one can choose a dynamic – risky – investment method from a low-risk conservative strategy. It is best suited for investments of more than 10 years, when the long term horizon balances out potential fluctuations in the markets.
Let’s add some numbers to explain why we recommend not being too conservative over a long horizon of several decades. An investment of five hundred a month for 30 years at various valuations (and we leave out the state allowance) would generate:
- 3% per annum – approximately 290,000 CZK
- 5% per year – approximately 407,000 CZK
- 7% per annum – approximately 590,000 CZK
Today, there are countless options for saving and investing. Be it individual stock selection, investing through mutual funds or buying gold. In this way, we can achieve far fewer goals than just getting a pension. Sub-retirement savings, which can be set up with one of the nine pension companies, bring many advantages that were not available in the previous variants.
1. State contribution
The government supports retirement savings, including state subsidies. To qualify for the allowance, you must deposit at least 300 kroner per month, and then the government will add 90 kroner. In total, the state will contribute up to 2,760 crowns per year. When you send 1,000 crowns per month, you get the maximum contribution from the state.
The government is now considering making the acceptance amount conditional on the increase in regular monthly deposits, which is considered a step in the right direction. The state requires citizens to save more for their retirement so that it can encourage them to do so. If we take into account that this is a long-term investment for a pension, increasing the contribution from 300 to 500 CZK (not taking into account the state contribution, which is also estimated) is more dynamic than 100,000 CZK. Investment after 20 years.
2. Tax relief
Together with the state’s contribution, you can save up to 3,600 crowns a year in taxes. You can calculate relief on your tax return from deposits worth more than 1,000 kroner per month. If you want to take advantage of the maximum tax benefit, it is necessary to send 3,000 crowns per month to additional pension savings. Another favorable tax benefit awaits those who have paid their savings for at least 10 years after reaching the age of 60. This will exempt them from 15% income tax.
3. Employer contribution
The employer’s contribution to additional pension savings is a welcome employee benefit, and it also pays the employer as his contribution is exempt from all social and health insurance contributions up to 50,000 kroner.
4. Start as soon as possible and save for children too
If I had to give you one piece of advice about saving for retirement, it would be: Start as soon as possible and don’t stretch your money. The longer my investment horizon, the less I need to set aside each month. The numbers speak for themselves. To have a million by age 60, you need to save monthly (at an average rate of 6% per year):
- About 500 CZK in 20 years
- Approximately 2,200 CZK at age 40
- About 6100 CZK in 50 years
In this regard, the most interesting option is to start saving as part of additional retirement savings for children, who may also receive a state allowance, and in this case, additional retirement savings will increase the compound interest for decades. Even Albert Einstein called compound interest the most powerful force he had ever encountered. He knows what he’s talking about.