At first glance, the saying “Saving means investing in your future” may sound cliché. Yet it contains a timeless truth. Despite this, relatively few people actively invest for retirement in a way that allows their savings to grow beyond the simple sum of deposited funds. Meanwhile, inflation gradually erodes purchasing power, meaning that simply setting money aside may not be enough to maintain its real value decades from now.
By reading this article, you can better prepare yourself and your finances for retirement. Whether it’s just around the corner or decades away, you’ll find practical guidance on estimating your future financial needs, understanding available savings and investment options and avoiding common mistakes.
Early awareness will help you understand how retirement accounts and programs work – and what risks they involve. This makes it easier to choose a strategy tailored to your needs and capabilities, allowing your money to work effectively for your future.
How much money will you need in retirement?
Although no one can predict the future, one thing is certain: you will need money. It will determine whether you can maintain your lifestyle, pursue your goals and cover essential expenses – including healthcare.
Your everyday expenses will likely look very different in a few decades. Inflation gradually erodes purchasing power and over time its impact becomes more and more significant. In addition, your lifestyle may change. For some, retirement means reduced spending and rest; for others, it’s a long-awaited opportunity to travel and pursue passions.
Public pension systems (such as Social Security–type systems) calculate benefits based on factors like years worked, contributions paid, and average earnings. While state pensions offer stability, they may not be sufficient to maintain your current standard of living. Demographic trends can also affect future payouts.
That’s why it’s crucial to estimate your retirement gap – the difference between the income you will need and the amount you expect to receive from the public system. The earlier you act, the bigger your chance of closing that gap.
The key? Regular saving, informed investing, and using appropriate retirement accounts and programs.
When should you start saving?
Simply put, the earlier the better. When it comes to saving for retirement, time plays a crucial role. The more of it you have, the smaller the amounts you need to set aside to reach your long term goal. This is thanks to the power of compound interest, which allows your money to start working for itself over time, and increasingly effectively.
Unfortunately, time cannot be made up for – even high rates of return will not compensate for irregular saving or starting too late.
A simple example illustrates this well. Let’s assume you want to accumulate EUR 200,000 by the time you retire, and your investments generate an average annual return of 6%.
If you start saving regularly at age 25, setting aside around EUR 145 per month would be sufficient.
If you delay the start until age 35, the required amount increases to approximately EUR 245 per month.
However, beginning the process at age 45 means you would need to save more than EUR 440 per month to reach the same goal.
As you can see, the saying “time is money” takes on a very literal meaning here. But it is worth adding one more thought: consistency is the key to success. Even small amounts, when saved regularly, can build substantial capital for the future over the long term.
PART 1: The most common ways to save for retirement
Besides regularly setting money aside in a standard bank account, retirement savings can also be accumulated through dedicated long term retirement plans. In many countries, these accounts are designed specifically to support retirement goals and often include tax incentives.
Importantly, contributions made to such accounts are typically invested in financial assets that may generate returns over time. The objective is capital growth, but it is essential to remember that all forms of investing involve risk.
Before choosing a specific retirement solution, it is worth understanding how it works, including both its advantages and potential risks. The availability, structure and tax solutions for retirement plans vary by country.
Employer sponsored retirement plans
In many countries, employers offer workplace retirement schemes as part of employee benefit packages. Participation is often voluntary, although in some systems automatic enrollment may apply.
Contributions are usually made by the employer, sometimes supplemented by employee contributions. The accumulated funds are invested, typically in diversified investment funds with a balanced risk profile. Such plans may offer several potential advantages. These can include employer contributions, which increase the total amount invested, as well as professional portfolio management, meaning that investment decisions are typically made by experienced institutions. Depending on local regulations, tax incentives may also apply. In some jurisdictions, accumulated funds may be protected from creditors and can be transferred to beneficiaries in the event of death. At the same time, certain limitations should be considered. These plans are not universally available, as not all employers offer them. Changing jobs may reduce flexibility or affect continuity of participation, depending on the structure of the scheme. In addition, employees often have limited control over the investment strategy, since key decisions are usually made by the plan provider.
Because investments are typically managed by professional institutions and follow diversified strategies, these plans are often considered relatively moderate in risk compared to fully self directed investing.
Individual Retirement Accounts
Individual retirement accounts are among the most common tools for long term retirement savings and are available in many countries, although their structure and tax treatment vary depending on local regulations. These are personal accounts into which individuals can make contributions independently, usually within annual limits defined by law. Depending on the market, they may take the form of savings accounts, investment accounts or hybrid solutions, and are often associated with tax incentives.
Funds contributed to such accounts are typically invested, and the account holder decides how the money is allocated. Available investment options may include shares, bonds, ETFs or investment funds, depending on the specific framework in a given country. This structure provides flexibility and allows individuals to tailor their investment strategy to their personal goals, time horizon and risk tolerance.
One of the key features of individual retirement accounts is the level of control they offer. The account holder determines both the contribution level and the investment allocation. This approach places full responsibility for investment outcomes on the individual. Financial markets are inherently volatile, and the value of investments may fluctuate over time. Equity markets in particular, which often form a significant part of long term retirement portfolios, can experience periods of both growth and decline. For this reason, such solutions may be most suitable for individuals who understand that long term results depend on market conditions and who are prepared to make active investment decisions, while accepting that temporary decreases in portfolio value are a natural part of investing and may occur even shortly before retirement.
Insurance based retirement programmes
These solutions combine life insurance coverage with long term savings. They are often offered by private insurers as integrated “two in one” products and are available in various forms across a number of European markets, although their structure depends on local regulations. The key feature of this dual structure is that it provides both financial protection for beneficiaries and a mechanism for building retirement capital. In some cases, these products may include a guaranteed minimum rate of return or predefined payout conditions. Funds accumulated within such programmes can typically be transferred to designated beneficiaries, which may be particularly relevant in the event of the policyholder’s premature death.
However, insurance based retirement solutions are not without limitations. Potential returns may be relatively modest when compared to inflation risk, and such products often involve higher fees and insurance related commissions. They may also offer limited flexibility, as early termination or withdrawal can result in additional costs or reduced benefits. As with any long term financial commitment, it is important to carefully review the contractual terms, cost structure and risk profile before making a decision.
PART 2: Which assets can contribute towards your retirement?
Although retirement savings programmes offer a certain degree of flexibility in selecting the assets that fund them, they also come with limitations. Not every financial instrument is available within them.
Assets that are generally not available within retirement accounts
These include cryptocurrencies, which due to their high volatility, limited or evolving regulatory frameworks and elevated risk levels are often excluded from retirement accounts. Other commonly restricted instruments include futures contracts, contracts for difference (CFDs), and instruments with leverage. These are typically considered speculative instruments. Since the primary objective of retirement accounts is the steady and long term accumulation of capital, such high risk instruments are frequently not permitted within pension structures.
Physical assets such as gold and real estate are treated somewhat differently. While it is generally not possible to purchase a gold bar or a residential property directly through a retirement account, investors may be able to access funds or ETFs that invest in these markets, or shares of companies operating within them, such as construction firms or gold mining companies. In this way, it is possible to gain indirect exposure to tangible assets without breaching the rules governing retirement accounts.
Some assets may be formally permitted but still unsuitable due to excessive risk. Examples include penny stocks and companies with very low market capitalisation. These are often characterised by low liquidity, high volatility and a greater risk of bankruptcy. Over a long investment horizon, such characteristics may result in losses that are difficult to recover.
Turning to assets that are generally considered more appropriate for retirement portfolios, these typically include equities, government and corporate bonds, and exchange traded funds (ETFs).
Stocks
Stocks give their holder an ownership stake in the company that issued them. As a general principle, the more stable a company’s position in the market, the lower the investment risk typically associated with its shares. In the context of retirement savings, shares of large, well established companies with strong market positions, commonly referred to as blue chip stocks, are often considered particularly relevant. These companies tend to exhibit lower volatility compared to younger technology firms or startups.
Many blue chip companies also distribute regular dividends to shareholders. Dividends represent a portion of a company’s profits and, when reinvested, can contribute to long term capital growth through the effect of compounding, further supporting the accumulation of retirement savings over time.
Exchange Traded Funds (ETFs)
One of the key advantages of ETFs, particularly in the context of long term investing such as retirement savings, is diversification. An ETF may track a broad market index, such as the S&P 500, or focus on a specific sector, for example technology or energy.
ETFs differ in terms of risk level, and this risk is often assessed by independent rating agencies, which can help investors evaluate and compare different funds. Such assessments may support the analysis that should precede any investment decision.
By providing exposure to a wide range of securities within a single instrument, ETFs make it possible to build a diversified and flexible investment portfolio. At the same time, they can save time, as investors do not need to analyse each individual company separately.
Government and Corporate Bonds
Bonds are generally distinguished by their relatively lower risk profile compared to many other asset classes. This applies in particular to government bonds issued by sovereign states, which are often used as part of a long term investment strategy aligned with a defined time horizon. Their interest payments can provide a degree of income stability and, in some cases, may help protect capital against the effects of inflation, depending on the bond structure.
Corporate bonds, issued by companies, typically involve a higher level of risk. Their performance largely depends on the financial condition and creditworthiness of the issuer. At the same time, they may offer higher potential returns compared to government bonds. As a result, bonds can serve as a complementary component of a diversified portfolio for investors seeking a more balanced approach to building retirement capital over the long term.
How to adapt your strategy to your age and life situation
As mentioned earlier, the sooner you begin saving for retirement, the better. A younger investor’s advantage lies not only in having more time, but also in greater financial flexibility. A longer investment horizon generally makes it easier to accept higher levels of risk, as potential losses may be recovered over time. Younger individuals also often have fewer financial obligations toward others and lower ongoing financial commitments.
As time passes, the investment horizon naturally shortens and priorities evolve. The closer one gets to retirement, the greater the need for stability and capital preservation. This shift in approach is commonly referred to as life cycle investing. It is a concept based on gradually transitioning from higher risk assets, such as stocks, to more conservative ones, such as government bonds or lower volatility ETFs. In practice, this adjustment may take different forms depending on individual circumstances.
After the age of 30, many individuals experience an increase in expenses related to purchasing a home or supporting children. At this stage, maintaining flexibility in the portfolio can be important. Regular contributions, even if relatively modest, may be allocated to higher growth assets such as equities or sector focused ETFs, which offer the potential for stronger returns over the long term.
In one’s 40s, it is often an appropriate time to review accumulated savings and reassess the investment strategy. Many individuals have already built a meaningful level of capital and may begin to focus more on protecting what has been achieved. While investing in equities does not necessarily need to be significantly reduced, greater emphasis is typically placed on risk management and portfolio stability. Introducing bonds, particularly long term government bonds that may be linked to inflation, can help create a more balanced relationship between growth and capital preservation.
After the age of 50, stability and loss avoidance generally become higher priority. Liquidity, meaning the ease of accessing funds when needed, also becomes increasingly important. At this stage, portfolios often shift toward a larger allocation in bonds, money market funds and defensive ETFs, with the aim of reducing volatility and protecting accumulated assets.
At every stage of life, however, investment strategy should be aligned not only with age but also with personal circumstances. Income stability, the number of people depending on you and overall health are all factors that can influence financial decisions. A single professional living in a large city may adopt a different approach from a parent of three children or a self employed individual. Retirement planning is therefore not solely about age, but about adapting strategy to one’s broader financial and personal situation.
Mistakes to Avoid
Opening a retirement account and investing your funds is only the beginning of the journey toward building long term financial security. Along the way, it is easy to make mistakes that can undermine even seemingly well designed plans. Fortunately, avoiding common pitfalls does not require learning through costly trial and error, especially when lifetime savings are at stake. Becoming aware of the most frequent investor mistakes in advance can significantly improve long term outcomes.
Consistency is essential for achieving real capital growth. Regular contributions, even relatively small ones, can produce meaningful results over time. For this reason, keeping funds exclusively in a low interest bank account may limit long term potential. Such an approach does not allow capital to grow effectively and may not even offset the erosion of purchasing power caused by inflation.
Equally important is maintaining a well balanced investment strategy. Although balance means something different for each investor, extremes can be equally harmful. Excessive caution may result in insufficient capital accumulation to support financial security in retirement. On the other hand, an overly aggressive approach involving significant risk exposure may lead to losses that are difficult to recover. A strategy aligned with age, financial goals and personal risk tolerance provides a more sustainable foundation for long term retirement planning.
Summary
Estimating the amount you will need in retirement is the first and one of the most important steps in planning your financial future. Equally important is selecting an investment strategy that aligns with both your goals and your financial capacity.
Approach this task with a practical mindset. Retirement planning is not about speculation or short term bets, but about allocating capital thoughtfully in a way that can generate real returns over the long term while allowing you to maintain peace of mind along the way. Financial security in retirement is important, but so is your wellbeing. Taking care of your health today is just as essential as building your savings, helping ensure that your future is not only financially stable, but also balanced and secure.
FAQ
When is the best time to start saving for retirement?
The best time to start saving for retirement is as early as possible. Starting early gives you more time to build sufficient capital and allows for greater flexibility in investment decisions. A longer investment horizon may make it easier to allocate part of your portfolio to higher risk assets, while also providing more time to recover from potential losses.
Is investing for retirement always associated with risk?
Investing inherently involves risk, including when the objective is long term retirement savings. Market values may fluctuate and returns are not guaranteed. Risk can be managed through diversification, careful asset selection and aligning the portfolio with one’s risk tolerance and time horizon. Individuals who prefer a more structured or professionally managed approach may consider employer sponsored retirement plans, if available in their country.
How can I estimate how much money I will need after I stop working?
To estimate the amount required for retirement, it is helpful to calculate the so-called retirement gap. This represents the difference between the income needed to maintain a desired standard of living in retirement and the expected income from the public pension system. State pension benefits typically depend on factors such as years of employment, contribution levels and average earnings within the economy. Understanding this gap can help determine how much additional capital needs to be accumulated through private savings.
What should I do if I started saving for retirement too late?
A later start means less time to accumulate capital, but it does not eliminate the value of starting. In such cases, increasing the consistency and, where possible, the amount of contributions may help compensate for the shorter time horizon. Careful asset allocation becomes particularly important. It may also be worth considering retirement solutions that offer tax advantages, which can help reduce current tax burdens while building long term savings, subject to local regulations.