You need to take old age insurance into your own hands. It takes surprisingly little to get a decent pension, but you have to start early

The extraordinary rate of indebtedness of the Czech Republic continues. At the end of April this year, the state budget deficit amounted to 200 billion crowns. If we do not count the period since the outbreak of the coronavirus pandemic, this is the highest deficit in independent Czech history. And that includes the crisis year of 2009 with a result of -192 billion crowns. However, at that time it was a deficit for the whole year, not for a third of it, as this year.

If there was still a real option on the table before 2020 that the Czech Republic could withstand the unfavorable demographic development and aging population with the help of the pension reform, the last three years have definitively buried it. The debt of the Czech Republic almost doubled between 2020 and 2022 to almost three trillion crowns. And that is far from the end.

The unsustainability of the pension system, about which many economists had previously warned, but no one really listened to them, must be clear to everyone today. Citizens who are close to retirement today, the state can still support them as they age due to inertia, even though the system is already running on debt. However, current forty-five-year-olds and younger will clearly have to take care of their pension themselves, otherwise their standard of living in retirement will drop significantly.

Just look at how pension funding works. Today’s social security contributions will be completely used up on the pensions of the existing senior citizens. Within the framework of the first pillar of the state pension system, there is no mechanism through which today’s payer would save for his own pension in the future. Moreover, fewer and fewer people will work for more and more pensioners in the coming decades.

The state will probably continue to pay pensions even in 10, 20 or 30 years. But the money will no longer be enough to maintain the ratio of their amount to the average wage. If today pensions cannot guarantee a dignified old age for many people, over time they will not guarantee it for practically anyone. In short, the old-age pension will become pocket money, it will certainly not remain the main income from which one can live.

Take care of yourself
How to get out of it? Fortunately, there is a solution. Stop relying on the state and take care of your dignified old age on your own. Time is on the side of anyone who is still far from retirement. He always plays in favor of investors. If they start appreciating the money now, the portion of their income that they would have to put towards retirement provision will still be relatively small.

For example, in the case of a thirty-year-old person with a salary of 35,000 crowns, which is an amount that lags behind the current average and median wages in the Czech Republic, saving just 5% of income every month, i.e. 1,750 CZK, would mean a final sum of around 2.5 million crowns in old age.

All this at an average annual appreciation of 6%. The table below illustrates how important the function of time is – increasing the monthly investment by just 750 crowns leads to a difference of up to 1 million over a 35-year horizon.

Thanks to the long investment horizon, it is enough to invest relatively small amounts. Compound interest also plays in the investor’s favor – in the 10th year from the beginning of the investment, the returns represent approximately a quarter of the amount achieved. In the 20th year of the investment, it is already half, and in the 30th year, the interest on the invested amount is already over 60% of the reserve created for retirement.

The key is not to put money under the mattress or in a bank account, where it quickly loses value due to inflation, but to invest it. This is the only historically proven strategy for maintaining sufficient purchasing power.

In this regard, the so-called Investment pension account is to offer interesting possibilities in the Czech Republic – it is being prepared by the legislators as a more varied and advantageous alternative to the existing pension funds, which will allow you to invest in shares, bonds and other instruments and claim a tax deduction. It will be possible to reduce the tax base by the amount sent to the Investment pension account up to 48 thousand crowns. This is twice as much as is possible with existing pension funds. The investor thus achieves the maximum tax savings when investing 4,000 crowns per month.

Since the money can only be withdrawn after reaching the age of 60 and at the same time at least 5 years after the establishment of the Investment Pension Account, investment companies and securities traders are highly motivated to acquire clients for the new product and offer them a large selection of different products. With a high probability, it will be investors who will value money with a long-term horizon.

Unlike existing pension funds, the Investment Pension Account with state support allows you to use a whole range of strategies suitable for old age security. For example, ivy’s special investment program, whose strategy is inspired by how prestigious American universities take care of their funds – in addition to stocks and bonds, it also includes assets that are not so subject to the mood of the capital markets, such as gold or real estate. The entire program is built in such a way that it is more resistant in less favorable periods compared to similar products and then has a better initial position for times of growth.

ivy’s results so far show that his strategy is working exactly as intended. In the two years since it entered the market, it has built a position at the very top of the peloton in its category of exported products.

Although the Investment Pension Account is still in the legislative process, and according to the government’s current plan, clients will have to wait until January 1, 2024 for it to be launched, the Czech public should start looking into retirement insurance now. The ivy investment program is ready for all the benefits of the Investment Pension Account. As soon as the relevant legal standard enters into force, investors will have the opportunity to use investments in the ivy investment program precisely in the Investment Pension Account regime.

Although the launch of the new legislation is not until the beginning of next year, it is possible to start evaluating the money in the ivy program now. Thus, investors can use the time until the beginning of 2024 not only to accumulate an interesting amount, but also to experience the habit of regular investing, which is beneficial for long-term old age insurance. It uses the price averaging effect and moderates the effect of market fluctuations. At a time when unit prices are falling, the client will get more units with greater appreciation potential for the same amount. In times of high prices on the markets, on the other hand, fewer shares are acquired, which helps with possible declines.

The standard of living young people will have in their old age is largely decided today. Those who use the decades of time to their advantage and invest regularly are more likely to secure a dignified old age. Those who will rely only on the first pillar of the state, and leave their fate to the maneuvering politicians from one side or the other, are in danger of not getting enough money from the collapsing pension system even to survive.

Patrik Novotný – investment strategist at Colosseum