Having a 401K seems like a great thing. Invest money in almost any asset allocation you want, get maybe an employer contribution and have a tax advantage. So sweet…! But I can’t. I live in Belgium, and we do have another solution. Is it the best for us?
In Belgium, a similar systems exists: it is called the second pillar or the group pension plan. Not all employers offer it, but if they offer it, it is a standard solution for all employees. It is a retirement savings plan. You can not access the money before pension, (except for an advance when buying a house or building projects.) If you request the money before age 65, you are taxed big time. The employer always pays a part, the employee sometimes (the employer part is fixed in a company wide contribution policy: it is the same for everyone in your category). It usually comes with an additional death and accident insurance. This is a good thing: Company paid health insurance!
On the downside, you can not decide in what you invest. It is an insurance product: The law fixed a minimum return the insurance broker needs to offer: currently set at a rather high 3,75pct for contributions made by the employee.As the bulk of the belgians are hesitant to invest, this is probably the best solution. There is no risk for them and It gives them a guaranteed amount of money at pension age. Until a few months ago, I also thought this was by far the best thing I had seen.
But, now that I have read so much on the way other people can invest via their employer in some of the best trackers in the world, I now look at the Belgium system differently: we have no access to potential higher returns that come with a long time of being invested in the stock market. (working from 22 to 67 is rather long, no?)
So, here is how I take it. I see this employer pension plan as the bond part of my pension asset allocation. It is money that is very likely to be there when I reach 67. I can offset this capital guarantee by a 100 pct investment in equity via my other long term saving. This way, I am creating a more common sense asset allocation.
Here is why
1- I still have 28 years left. In this period, I expect to get higher results on the equity
2- If just before my pension, there is a major correction, I have the luxury to wait for recovery rather than selling low. I have the pension plan money that should be given to me.
3- I can always adapt my plans and convert my equity allocation to a equity/bond allocation when It makes sense (And I think it makes sense when the interest rates are relatively high again in the 10 years before my pension age)
Would you do the same?
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