How to Create a Great Financial plan for your life (New Series)

Part 1. Are you relying on the State (government) pension?

The path to financial security or simply a better financial life often begins with this realisation: there is only one person responsible for my financial security. (tip: it’s not your spouse!)

In the first part of this original series about “How to Create a Great Financial Plan for your life” let’s begin by considering a fundamental planning (and savings) principle: How will my State pension look after me or contribute to my financial future?

Future articles in this series will provide you with some thoughts, ideas and strategies when considering your alternatives for your financial future – but today we are focusing on the public-pension-plan route to retirement.

Let’s start where everything starts: Beginning with an end in Mind!

We all have different goals and dreams for our future, don’t we? Surveys and consumer companies selling to us tend to assume that we all want similar things: a comfortable life, the ability to stop working when we choose,  a holiday or two each year, time with our children and our loved ones, and.. financial security. However statistics and conclusions such as these cannot predict what you want, as an individual.

What are your goals? What does financial security look like, to you? 

(pause for a minute and reflect…. Take a deep breath maybe..)

In reality only you (perhaps together with your family) can answer this question.

Sooner or later we all have to consider tomorrow: what happens when we are no longer planning to work? When our income is not what it used to be and our hopes for a comfortable lifestyle have not changed?

Italy is a fantastic location to enjoy life, with incredible variations of nature, beauty, unique modern and ancient art, artisanal design and creative production. Some of the world’s most original and uniquely designed goods are produced here. The scope of travel and lifestyle experiences available are some of the best in the world.

Living here provides plenty of opportunity to discover, explore, and enrich your lifestyle and the overall quality of your life.

Once you experience what Italy has to offer, it’s hard to imagine reducing the quality of your life, and it’s tempting to avoid or handover the responsibility for your financial future to ..the government. After all (especially if you have no savings or perhaps only a small amount of savings or investments) they deduct significant taxes from my salary or business income, so you say, isn’t that where my pension should come from?

Doesn’t the INPS cover me for a pension?

Where does the money go? Dissecting INPS: Italian INPS is charged on every employed Italian worker at approximately 33% of gross salary/income and if you have a boss, the company pays around 2/3rds and one third is deducted from your pay. The government says the money is used to pay for the country’s health services (including your hospital visits when needed); provisions for unemployment benefits and sickness benefits when you cannot work; and disability payments for citizens in need, and finally a portion for the government’s age pension provision.

The facts

Since 2008 Italian pension laws require that you have contributed to the INPS (Italian social security scheme) for 35 years in order to be eligible to collect a pension at age 57 if you are a woman, or age 60 if you are a man. If you run your own business that requirement increases to 40 years of contributions (or deductions from your income, paid to the government).

IF you are eligible:

The Italian Average pension amount was 24,600 euro in 2009, before taxes are deducted!

There is no longer a ‘minimum’ pension payable or available since 1996 in Italy (although by providing sufficient evidence a pensioner with no resources and deemed to be  ‘below the social assistance level’, and only if aged over 65,  may be eligible for a government supplementary income of €5,000 euro p.a. or €7,000 for over 70’s)

The percentage of the working population older than 65 in Italy in 2009 was 32%. The OECD countries average was 23% (OECD report: pensions at a glance 2009).

In reality across Europe and the world many state pension schemes are not funded. They are essentially paid for from tax receipts collected last month.. or perhaps this month.. or sometimes even next mints receipts!)

In recent times we have all been made much more aware of government budget shortfalls and deficits, and their large debts to other countries and bondholders. Over the coming years, the workforce worldwide is set to become  smaller and at the same time we are all expected to live longer. Therefore fewer workers will be funding an increasing number of state pensions.

State pensions may not even exist when you reach retirement age, and the age of entitlement for the State pension will most certainly rise. What if future governments reduce or stop retirement benefits?

The verdict is in: Today in many countries including Italy, you are forced to make your own pension provision if you want to have any chance of a comfortable retirement!

Review point for you: 

Are you continuing to pay contributions to your overseas (original) state pension scheme while living abroad? Have you stopped paying? Are you aware of the impact of this on your future entitlement?

Planning for the future

At the state retirement age of 65, the average man will have some 19 more years to live and the average woman 22 years. 

If you do not qualify for a State pension (and this is more likely if you live and work in different countries), or if you are prepared to conclude that the chances of the government being able to provide a reasonable level of income to pay for your living costs are quite low,  then the question becomes: will you bring another pension (foreign) with you to Italy? or can you build a new private one? From where will your own “private pension” or retirement provisions come?

Those who start earlier get ahead faster.. : Imagine 2 brothers, one is 25 years old and the other is 35. Both have the same savings goal, to retire at the age of 55. The 25 year-old is able to invest €300 a month. By contrast the 35 year-old would have to increase his contributions to €803 a month to achieve the same potential returns as his younger brother, at retirement!

Your journey to financial security and looking after your financial future begins with the realisation that your future is in your own hands. For some this may be a daunting prospect, or a hell of a responsibility! However once you have taken a deep breath…. (allow yourself to breathe out..) it will pay to remember that “The journey of 1000 miles starts with one step.” 

A mindful tip: if you allow yourself to calmly reflect on this realisation (without anxiety), slowly but surely you will start viewing your life from a slightly different perspective, and that’s when information and opportunities that up until now have not received your attention, will be drawn into your awareness. The ways in which you can move forward to achieve your goals financially will slowly become clearer, whatever your goals may be.

Look out for the next installment and continuing tips and strategies in the “How to create a Great financial life plan” series.


All thoughts are my own. The information contained here is not personal financial advice tailored to individual needs.