The smart retirement dialogue

00:00:03: Welcome or welcome back to the Alfie next-gen finance podcast where we discuss trends in the Luxembourg fund industry.

00:00:09: In this episode, We'll explore a topic that impacts pretty much all of us how to retire and why it's important for your future comfort.

00:00:16: now I'm your host Natalie Gerhardstein And i'm joined today by Jaime Varagán A senior investment advisor at VGL BNP Periba.

00:00:25: Well

00:00:26: thank you!

00:00:27: Thank you for having me Today.

00:00:28: It is a pleasure being here

00:00:30: Just to start off, could you tell us a little bit more about yourself and the work that your

00:00:33: doing?

00:00:34: Absolutely.

00:00:34: So I am both Spanish & Luxembourgish.

00:00:37: I grew up in Luxemburg and studied abroad.

00:00:40: In Spain France London Co-started an advisory firm right after my Masters in Spain where i worked for around three years After which I decided come back to Luxemberg.

00:00:51: Tough part of that was convincing my now wife to come to Luxembourg, but she's absolutely delighted to be here.

00:00:58: And time flies because it has been almost six years most of which I professionally spent in BNP Paribas helping clients manage their multi-asset class portfolios.

00:01:08: So before we jump right and talk about guaranteeing the best retirement let go just over some basics.

00:01:14: what is money?

00:01:15: What investing or inflation?

00:01:17: Well, I really feel like we could spend the whole podcast just talking about this question.

00:01:23: About money.

00:01:23: let's you see maybe its functions.

00:01:25: it acts primarily as three items medium of exchange with a characteristic that must be globally accepted A unit-of-account and a store value right?

00:01:36: And if You See The Story Of Money First Of All It Was Coins Even Before Romans and Denarians.

00:01:43: Then It Evolves Into Paper.

00:01:45: And as a curious fact, the British pound sterling stands at all discurrences still in legal tender today.

00:01:52: It dates back from the eighth century and it initially represented that pounds weight in silver.

00:01:58: so The way we evolved into notes is quite simple.

00:02:01: instead of carrying gold and silver round which was heavy cumbersome and carried further risk an institution would safeguard that gold or silver.

00:02:11: give you piece of paper note.

00:02:12: that said guaranteed that if you went to an institution with a piece of paper, they would give you the amount of gold and silver.

00:02:21: And this is really how banks were born!

00:02:23: Now today obviously banks do a wider range of activities.

00:02:26: there's a concept of central banks.

00:02:28: in fact for Western economies You cannot convert your money into Gold or Silver anymore.

00:02:35: now we have what we call the fee at money.

00:02:37: That comes from Latin means trust In fact, when changing that for example in the early seventies with President Nixon in the

00:02:45: U.S.,

00:02:47: this was one of the factors that created inflation.

00:02:50: and to answer your question about inflation it is a sustained increase on the general price level of goods and services in an economy over time often referred or often evaluated from as baskets basket-of-goods such as milk butter meat etc.

00:03:07: And what he does ultimately is erode purchasing power in the eurozone, for example.

00:03:12: In the last twenty-five years or so far this century we have had around seventy to seventy five percent of inflation which means that what you could buy in two thousand four hundred today you're going to pay for these same amount of goods.

00:03:26: one hundred and seventy five.

00:03:28: And it is one of the items has pushed people towards investing right?

00:03:32: To try to increase that they have, at least to not lose a purchasing power.

00:03:36: And then from there you can go to risk your investments right?

00:03:40: I like to see investing as more from my philosophical perspective is the way of delaying gratification.

00:03:46: You had money today and could spend it on instant gratification.

00:03:50: Just put in somewhere with some hope for having more money down the road Right?

00:03:54: Ultimately what if cash was kept into bank interest or no return, throughout a long period of time?

00:04:02: inflation eats out one's purchasing power.

00:04:04: And that is one reason many people are pushed towards investing.

00:04:10: So what are the mechanics of Luxembourg's pension system today?

00:04:13: How would you say it compares with those in other European countries?

00:04:18: Well I guess we're focusing here on public pensions and its the state promises to pay us as we contributed through our life.

00:04:29: In Luxembourg, they're called the Solidarity Pensions also known as pay-as-you go pensions.

00:04:35: and how do they work?

00:04:36: It's basically current workers that are paying for current retirees with a promise or hope when their time comes well... ...they will be retired.

00:04:46: And you would have people paying for their pension.

00:04:50: There is a Financial Times article that was recently published around three weeks ago, that tackled this point saying whether or asking whether Europe could still afford its current state pensions.

00:05:01: In fact they were slightly more straightforward and mentioned described it as generous state pensions, right?

00:05:11: And to some extent the concern is legitimate.

00:05:14: There's no formal contract in place that gives you a guarantee As for example, it has been happening in countries like France or Spain where they delay the age of pension.

00:05:33: But on more positive note, Luxembourg remains relatively stable at least compared to many European peers.

00:05:41: you have positive items such as migration that sustains well the system.

00:05:46: You also have technology In which... Like other European countries and broadly you have an AI boom.

00:05:53: Also partly because of the hope of increasing productivity in workers.

00:05:58: It's expected that certain European countries by twenty fifty will have one and a half workers per pensioner, And obviously technology can play a huge part!

00:06:07: Let us not forget that Europe demographically is the oldest continent in the world.

00:06:13: The median age for population is above forty years which means you have more people who are below forty years.

00:06:21: From a financial standpoint Luxembourg is quite solvent with substantial low debt to GDP and good reserve fund of around for pensions.

00:06:31: It's about thirty-to-thirty five percent as off couple years ago, it's good news but obviously also means that in the future And its easier now make certain shifts towards more sustainable pension scheme throughout twenty, thirty, forty or fifty years.

00:06:51: But obviously these changes can be sometimes politically costly particularly in a country where it is estimated that only one in four private sector workers actually vote and the big part of voters are retirees.

00:07:09: that happens not only in Luxembourg, but all other European countries.

00:07:13: But here maybe the approach you have is sort of baby steps encourage a sort of fiscal initiatives towards private pension plans to what's life insurances

00:07:23: etc.,

00:07:23: etc.. I mean this is challenging topic with many political implications however and my key takeaway on these one is we as workers should take future in our own hands and prepare for

00:07:36: it And I think that segues nicely into our next question.

00:07:39: I'd like to hear your thoughts on what age most do or perhaps should start the retirement planning?

00:07:44: For instance, would starting in your twenties or thirties make a big difference?

00:07:48: well for To answer that question The most important topic here is compounding.

00:07:52: What is compounded exactly?

00:07:54: so let's say you stop with one hundred.

00:07:56: after one year You have a hundred and five sort of five percent return.

00:07:59: Is yet this idea that for the Next Year not only are going put these hundreds this initial hundred, but you're also going to put these five that yielded you already.

00:08:09: And it's going to create a sort of virtuous snowball effect with the help of time has proven to be quite efficient and I actually did numbers because i suspected this question just within numerical example is pretty self-explanatory.

00:08:25: let say every month you put two hundred euros aside per year have seven percent annual rate If you start at forty-five years of age, when you'll be sixty five by putting two hundred euros on the side.

00:08:38: You will end up with one hundred and four thousand euros in roughly twenty years.

00:08:44: if you start a thirty-five Years of Age so for a thirty year's period When you'll Be sixty Five Putting These Two Hundred Euros aside?

00:08:51: You Will have Two Hundred Forty Four Thousand Euros.

00:08:54: And if you Start Twenty-Five Years So Of Age So A Forty Year Period When you'll be sixty-five, over half a million.

00:09:02: You have five hundred and twenty-five thousand.

00:09:05: So as the conclusion I think that numbers speak for themselves.

00:09:09: The sooner we start...the better your likely going to be.

00:09:12: Indeed!

00:09:12: And i think it helps when put in very concrete number of people.

00:09:18: people could understand differently.

00:09:19: Is there a general rule in terms of how much people should aim to save each month as a percentage, maybe their net income?

00:09:25: And how can individuals sort-of balance the retirement savings with other early life goals such as buying at

00:09:30: home?".

00:09:31: Well... The traditional forty percent housing, forty percent living and twenty percent for saving slash investing is really good rule of thumb I would say but Person that works in finance I would say that a forty percent housing thirty percent living and thirty percent for investing is even better.

00:09:50: Everything is about balance, right?

00:09:52: You shouldn't have too much of a carpe diem situation where you completely Well, you spend all your money and completely disregard the future.

00:09:59: We shouldn't probably either just think about the future And Literally try to spend as little as possible because you don't bring them on into graveyard.

00:10:08: like many things in life balance is key, right?

00:10:12: And you asked about buying a home.

00:10:13: That's a long-term investment and it sort of well bounces back to this forty percent that you would spend on housing.

00:10:21: with the mortgage You're gonna be paying every month for twenty five thirty or thirty five years.

00:10:27: But what likely.

00:10:27: when your retire you will not have to take care Of those payments anymore.

00:10:31: so he takes A bit of weight out of that sort of financial pressure that you could Have once you retire.

00:10:37: also Think of it this way.

00:10:40: A home is a hard asset, and by the one that covers basic need which is sheltering.

00:10:46: if you invest in two shares into ETFs bonds or even bars of gold You cannot eat bars of Gold.

00:10:52: they can not shelter you whereas a house can.

00:10:55: so all-in-all It could be a good idea but obviously buying at a good price Is important particularly current rate context And you will tell me yes But Jaime banks will usually require initial capital.

00:11:09: Honestly, I would encourage people that think of buying a house to go see a bank.

00:11:13: See what type of home they want to have?

00:11:16: What type of budget did need and how much it will be in terms of initial capital because that's only going to help them... ...to have the goal or how much you need to save is only going.. ..to be able to have this discipline of saving towards their

00:11:31: goals.".

00:11:31: That was very practical advice!

00:11:35: Let's talk about the concept retirement number, how would one calculate that they need based on their own lifestyle goals like travel maybe or family support?

00:11:46: That's an excellent question.

00:11:47: There is no universal answer as such.

00:11:51: it really depends upon your lifestyle you'd want to have right.

00:11:55: let me turn this around How much are your costs going be?

00:11:59: and should adjust inflation too And this is a concept that was born in the

00:12:04: U.S.,

00:12:04: and it's called an endowment, with an initial amount of money.

00:12:10: how much would you need to finance projects throughout time or your cost-of living?

00:12:17: So let us say ten million.

00:12:22: to summarize... To give an example.

00:12:25: These ten million give you sustained six percent.

00:12:29: Well half Well, let's say two and a half is going to be inflation.

00:12:32: And half of it is going because so you end up having three percent.

00:12:36: on this three percent off ten million is three hundred thousand euros.

00:12:40: well probably enough for most of us right?

00:12:42: Well maybe you need a little bit less than.

00:12:44: but Let's not forget that markets can be or in any investments could be volatile an even I'm not going to have six percent every year.

00:12:52: So It is also encouraging to keep a steady stream of income.

00:12:59: Okay, great.

00:12:59: Thank you.

00:13:02: What are

00:13:02: some of the biggest personal finance mistakes young savers make?

00:13:06: Well I'd say The first one is leaving above-the-means.

00:13:11: So and that actually Is quite a recurring topic in the US where there is quite a lot of credit cards sort of debts You would buy a car with you know With with alone.

00:13:23: you wouldn't go on holiday with alone.

00:13:25: And i think That here you need Some budgeting.

00:13:29: you need to have also a realistic expectation and realistic approach of what your situation is.

00:13:36: And by living, well certainly within your means I think it already is big step.

00:13:43: second one obviously having an emergency fund.

00:13:46: i think its quite important.

00:13:49: another point that's very relevant sort of personal finance mistake is lifestyle inflation and it's the concept of hiking expenses as you have salary increases or further money coming in.

00:14:04: So let's say, you have a bonus Or you have promotion And for example an extra five ten fifteen thousand euros per year.

00:14:15: You should Have certain discipline to allocate this extra money evenly towards your different goals.

00:14:23: You shouldn't just splurge it on something or at least I wouldn't say, It is the right approach.

00:14:28: And for that to use an example of someone i've met around five seven years ago and That person was earning between twenty and thirty thousand euros net per month.

00:14:40: He genuinely told me he was concerned because he had trouble going all the way To end of a month despite his huge salary.

00:14:47: Why?

00:14:48: Because he hiked his expenses His lifestyle.

00:14:51: He flew business He was out every time, constantly traveling buying whatever he felt like.

00:14:57: And obviously you need to keep your heads on your shoulders in that sense and try to budget and have this discipline of following through with the plan that you have in mind.

00:15:10: Another point might be also a personal finance mistake is avoiding risk at all costs.

00:15:17: but there is quite important to have an understanding of volatility and long-term expected returns, particularly if the lifespan or sort of investment horizon is more towards the fifteen, twenty, twenty five plus years.

00:15:32: I will give an example of the MSCI world which is an equity index that basically encompasses companies from the US Europe and Japan mainly If you take their returns from ten years and twenty-five years in Euro terms, In ten years.

00:15:50: You're doing twelve point five percent annualized returns which is double digits And it's quite good.

00:15:55: obviously the three last years of the stock markets have been quite helpful.

00:16:00: however if you see a Twenty-five Years It has been six point three percent annualize return and if you had invested on the last day Of nineteen ninety nine It would have in this index.

00:16:12: He would've taken you up to twelve years, twelve To recover and markets can be tricky.

00:16:18: so I think there's a few considerations There right.

00:16:21: the first one is that what has worked?

00:16:23: In the past in terms of strategy And in terms off performance does not mean that it's going to work in The future.

00:16:29: another One Is That i always say it's quite important to understand What he's done where your invested under risk that it carries.

00:16:38: maybe.

00:16:38: as A third point i'd Say That it might be good to be accompanied by professionals in this investment journey.

00:16:45: retail investors or People that maybe do not have an extended knowledge can fall into traps quite easily Or they may act on emotions and cognitive biases.

00:16:57: And at the end of the day investing is not gambling.

00:17:00: another item I would consider as sort of personal finance mistake is completely neglecting diversification.

00:17:08: It has been proven that it reduces volatility without necessarily sacrificing returns.

00:17:14: we're now discussing about the possibility of owning a home, your own real estate and that's already diversifying maybe from another portfolio.

00:17:21: you may have whether stocks funds, ETFs.

00:17:24: You can also have bonds you think of commodities or precious metals and generally it has proven to be quite efficient into avoiding big drops in volatility.

00:17:37: Taxes are also quite relevant right?

00:17:40: In a country like Luxembourg where certain advantages such as if your resident holds for some period You might be exempt of capital gains, you can have also fiscally deductible pension plans or life insurances.

00:18:00: Those are the little things that one should consider because they could quite impactful on a long horizon journey in investing.

00:18:09: and lastly I would say personal finance mistake is maybe we should add financial education both from private initiative but also public.

00:18:21: However, I must say that the government is already doing a few steps towards it and among which I believe Alfie's also an initiator of these.

00:18:30: so thats quite good.

00:18:35: You've given us many good key messages but are there any maybe specific takeaways you'd like to leave with the audience

00:18:40: today?

00:18:41: The first one is ownership in your future even if the Government is here i think we should take initiatives partially provide towards your retirement plan.

00:18:54: The second one is starting soon, because time will do the rest.

00:18:58: or a third sort of key takeaway would be balance between today and the future And when you set up a plan trying to stick to it... ...and the fourth one- this probably keyword for our podcast is discipline.

00:19:17: Investment or sort of long-term investment is a journey.

00:19:21: For that, obviously we do not need to go from zero to one hundred.

00:19:26: We mentioned this possibility of putting two hundred euros aside.

00:19:29: Maybe it cannot be two hundred It can be fifty euros aside And you already see the impact it could have.

00:19:34: So these baby steps with discipline Because in this world Of investments Let's not forget That Rome was not built In One Day.

00:19:44: Don't be discouraged Thanks.

00:19:45: It's all great words of advice and I think, I appreciate it And i think our listeners would appreciate as well the concrete examples you've provided today in real terms.

00:19:54: Thank You Of Course to All Our Listeners.

00:19:55: As Well.

00:19:56: Don't Forget To Check Out The Other Episodes On The Alfie Website At Alfie.lu And on Paperjam.lu Plus.

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