You Should Have Started Planning Retirement Years Ago

If you haven’t yet, chances are your future is looking grim

Björn Berg Gunnarsson teaches people about money. As the former Director of Research and Economics at Íslandsbanki, he was in charge of financial education at the bank for over a decade. Presently, Björn gives lectures on personal finance, savings, housing, loans and pension. We reached out to Björn with a question about whether someone whose retirement is at least 30 years away should already be thinking about it. His response? A clear and concise “yes.”

GV: How does the Icelandic pension system work? What should one know about it to maximise the benefits?

The first thing to keep in mind is that the system is quite complicated. It’s well-funded and provides a lot of flexibility for people, but the decisions aren’t being taken for you.

The basic experience of people moving to Iceland is that their employer makes automatic payments. They take care of what is mandated by law. There is an additional private pension plan that people will have to take care of themselves. They will have to go to their bank or the pension fund, sign a contract, and then get the 2% add-on from their employer.

There is what we call pension insurance, which will later give you a monthly salary or monthly payments for the remainder of your life after reaching a certain age. It also provides you with insurance in the form of disability payments and payments towards your spouse and children if you die. Within the mandated system, you also can pay a part of it into a private pension plan, which means that you’re not paying into a scheme that will pay you for the remainder of your life. But you are basically just saving money. The benefit is that when you get older, you can use that money whenever you want. The cons is that that money will run out when you have finished using it.

“Just doing the minimum required is not enough to have ample revenue and live a good life when you’re older. Most people need to do something extra.”

It can be very difficult to comprehend the whole thing. People must be aware that, although the system is quite good, just doing the minimum required is not enough to have ample revenue and live a good life when you’re older. Most people need to do something extra.

GV: How does the retirement age affect pension benefits?

Usually, the expected retirement age is 67. But there is huge flexibility regarding when you decide to take your pension. The younger you are, the less it will be because it will be spread over a longer time. Usually, people start withdrawing their pension when they stop working or when they reduce their workload and not before that because of tax reasons. If you are working and withdrawing your pension, you might be going up the tax bracket, resulting in substantial tax payments.

GV: Should people in their 20s or 30s be concerned about planning for retirement at this stage?

Yes. There are two periods when people should be thinking about this. One – as early as possible. When people are in high school and start working on the weekends, they should sign up for a private pension scheme. That is because most of these people want to buy an apartment eventually. If you save early like this with your employer, it will make a difference. When it comes to the point that you want to buy an apartment, you can withdraw this money tax-free to use as a deposit. Many young people buying apartments today use their private pension plan to help do that.

Photo by Art Bicnick

When people are around 45 to 50, they start thinking a bit differently. If they start thinking about their pension this early, they might have some way of increasing their possibilities when they’re older. If people do only the mandated thing and pay what they need to the pension funds, there’s a likelihood that they won’t be able to enjoy their retirement hugely. Yes, you’ll get some pension, but you’re not going to be rich. It’s not going to be an awful lot of money to pay for things that might be nice, like quitting your job earlier, reducing your workload earlier, or taking another job that may be more entertaining, but doesn’t pay as well. All of those things cost a lot of money.

If people have started preparing themselves using the possibilities within the pension system, they might have vastly different options.

GV: How can the current state of Icelandic economy and inflation affect your retirement planning?

A lot of Icelandic pension savings are protected from inflation. People can keep their private pension in an inflation-protected account. The pension funds use a lot of government bonds which are inflation-protected. They also buy stocks in inflation-protected companies, like grocery stores and insurance companies, and invest abroad because there’s inflation protection in investing in foreign securities.

GV: Could you recommend any helpful resources on retirement planning?

There’s a website called lifeyrismal.is, run by the Association of Icelandic Pension Funds. It’s a very good source of information, available in Icelandic, English and Polish. If people want to read up, it’s probably the best place. If people are a bit older, I would advise them to get to know their pension fund, their rights within that pension fund, their options and the Social Security Administration.