More than half of the people who live in Lithuania – 6 out of 10 – recognize that after retiring they will need an additional source of income besides the Sodra state social insurance pension. But while they understand the need, a full one-fifth of them say that they have not arranged for such an income source.
A quarter of respondents, meanwhile, said they do not know whether they will need additional money besides a Sodra pension in retirement, and 17% answered that they will not need additional funds. Such were the findings of a representative survey of Lithuanian residents on behalf of INVL Asset Management, one of the country’s leading asset management companies, which Spinter Tyrimai conducted this September.
Income will fall dramatically after retirement, but not all take that into account
Groups that more often had no opinion about the need for additional sources of income in retirement besides a Sodra pension included younger respondents (age 18-25) and those with smaller incomes (201-300 euros a month). Meanwhile, older people (age 56+), those without a secondary education and those with small incomes (200 euros or less) more often thought they would not need additional money in retirement. The fact that a Sodra pension will not suffice in old age is more often understood by people age 26-55 and those with bigger incomes (more than 500 euros).
As of July this year, the average Sodra pension in the country for those with the required length of service was 323.70 euros, or just under 45 per cent of the average wage after taxes, which in the second quarter of the year was nearly 722 euros.
“The survey showed that quite a big share of people, especially youth and those who earn less, still don’t realize that they’ll need additional sources of income to maintain themselves in retirement. That’s easiest to grasp if you think about what life would be like if your monthly income suddenly fell by more than half,” said Dr Dalia Kolmatsui, the Head of Pension Funds & Retail at INVL Asset Management.
That amount of money, she noted, probably would not be enough even for basic necessities, not to mention travel, hobbies and gardening – the things people in Lithuania said in a survey that they dream about doing in retirement if money was not an issue. To ensure not just a dignified standard of living but also one’s other desires, it is crucial to arrange for additional income in old age while you’re still working, and that’s what pension funds let you do, she said.
Even knowing that they’ll lack money in the future, one in five does nothing about it
Of those who think that they will need additional sources of money in retirement, 53% are currently accumulating in pension funds, 25% are saving money, and 13% are accumulating money in both pension funds and unit-linked or permanent life insurance. Other forms of saving that respondents mentioned include investments in real estate (10%) and unit-linked or permanent life insurance (11%), while 12% said they have arranged for other sources of income. Accumulation in pension funds is more frequent among people age 26-35 and 56 or older. People middle-aged and older (age 35-55) more often simply save money.
One in five of those who think that they will be short of money in retirement currently has not arranged for additional sources of income. Groups that more often have not arranged for additional sources of money include the youngest respondents (age 18-25), those without a secondary education, and those with small income (200 euros or less).
“These numbers show that a significant share of people in the country, and particularly financially sensitive low-earners, may become extremely vulnerable economically when they retire. While it’s never too late to start saving for retirement, young people have the best chances to accumulate money for old age: when you start saving earlier, you can accumulate the needed amount by setting aside smaller amounts over a longer period of time. Moreover, pension accumulation in the 2nd pillar is beneficial for those who get less income, since the share of the state incentive contribution to the pension funds that they get is bigger in percentage terms,” Dr Kolmatsui said.
In 2019 pension reform will encourage more people to save
2nd pillar pension funds offer the opportunity to accumulate money apart from one’s Sodra pension in a personal pension account, and in old age to get a pension from two sources: from Sodra and from the pension fund. As of 2019, the formula for accumulation in 2nd pillar pension funds is changing and, following the tax reform, people who work will be able to allocate money for accumulation in pension funds. Starting in 2023, all 2nd pillar participants will accumulate according to the formula “3+1.5%” (contribution by the participant of 3% of their gross wage plus contribution by the state of 1.5% of the average wage in the country the year before last).
Those who prior to 2019 accumulated maximally (on a 2+2+2 basis, putting in money of their own too) starting next year will shift to the new formula automatically, while those who accumulated minimally (on a 2+0+0 basis, only transferring a part of their Sodra taxes to a pension fund) can choose to transition gradually over several years or to make the shift immediately. Also, from the start of 2019 until the middle of the year, it will be possible to halt accumulation in a fund and leave the money there or return with the accumulated amount to Sodra. In addition, as of 2019 more people will participate in the 2nd pillar pension accumulation system – all those up to the age of 40 who work and are not accumulating for a supplementary pension will be included in the accumulation system with the possibility of opting out.
In order to maintain one’s current standard of living after retirement, ensuring income that is about 80% of one’s pre-retirement level is recommended. You can learn more about the changes after the pension reform and ways to arrange now for a dignified old age by accumulating for a pension, on the special INVL webpage at invl.com/reforma.
Spinter Tyrimai conducted the representative survey of Lithuanian residents’ investment and saving habits, on behalf of INVL Asset Management, in September this year. For the survey, 1011 people age 18-75 were interviewed, of whom 867 were not retired.
INVL Asset Management, which is part of the Invalda INVL group, has been managing pension funds ever since it was founded in 2004. The company also manages mutual funds, alternative investments and individual portfolios. Over 190 000 clients in Lithuania and Latvia and international investors have entrusted the Invalda INVL group’s companies with the management of more than 650 million euros of assets.
Note: When referencing these survey results, please identify the source.