To avoid an excessive reduction in the standard of living once you reach retirement age, there are three main avenues you may follow. Pension funds, purchase real estate and financial investments. These tools are difficult to compare because they are very different from each other and subjected to different tax systems. We will therefore illustrate only in outline the main advantages and disadvantages.
Pension funds are suitable for those who want a rather high annuity and above all guaranteed by a contract. They have the disadvantage of providing an annuity only in the distant future or not to be easily accessible in case you need to use in advance of liquidity set aside. In other words it is not easy to get out of a pension fund. Investments are subject to market risks. It is therefore necessary to provide for a reduction in these risks gradually as you approach retirement age.
Real Estate’s main advantage is the fact that theoretically you can produce an income from the day of purchase if you find a tenant who pays the rent. In addition, it always constitutes a patrimony to bequeath to family or other heirs. As for its disadvantages we include the risk of not being able to rent the property or finding renters who do not pay regularly, the risk that the property depreciates over time, the risk of not being able to sell it in short time and the weight of taxation and the costs of operation and maintenance.
Financial investments and the pros of financial market instruments live in the flexibility in the use of savings during the years of working life. It is relatively quick and easy to sell shares of a mutual fund. Investments are preferred by those who want to get away at the age of retirement with a capital to be passed to their children to support them in their work or studies. The cons of financial investments lie in the fact of not allowing an annuity guaranteed by a contract. In addition, they put themselves at the considerable disadvantage that the capital is exhausted before the death of the interest. To put it another way, these investments do not provide guarantees in respect of increased life expectancy. Finally, just as pension funds, investments are exposed to risks which should reduce with the passage of years.