Hello all,
This is my first post so first, thank you in advance to the community. A little bit of context. I live in Chile where we have a private-pension fund known as AFP. Recent laws would allow me to withdraw about 2-3k USD from my savings for my use (if I wish to exercise it).
Hypothetical question. If you have 2-3k USD on a fund with gives you a stable long-term 4-6% interest rate. Would you take it out and put it in ETFs? (Lets say its for your pension 40 years down the line)
Cheers and thank you in advance!
You're fortunate to have 40 years until retirement! I wish I had been this proactive when I was your age, some 25 years ago...
If you look at the S&P500 over the last 40 years, it has averaged around 9% return, or over 11% with dividends reinvested.
Ok, so past performance is no guarantee of future results, etc, etc, but you'll certainly be doing a lot better than leaving it in your government scheme.
A couple of things to consider:
First, your government scheme will be relatively low risk - you won't see the large movements from market volatility that you'll see with the S&P.
Second, this volatility is what gives you the better return, so you need to become comfortable with the fact that you might need to time your exit when it comes time to retire. If you were planning to retire in March 2020 for example, you would have to leave your fund alone until the fund recovered from it's Covid related low.
This means that you would give yourself access to your funds not on a defined date, but within, say, a five year window. Have a look at the S&P for the last 40 years, you will see that even during any of the last 3 market crashes, it doesn't take more than 2 or 3 years to recover. By accepting this, you will have an excellent return and ensure that you pull your money out of the fund at a time where it has achieved the greatest possible return.
Here in New Zealand we have the choice to put in somewhere between 3% and 10% of our earnings into our government fund. As I'm only 15 years away from retirement, I should be putting in as much as possible. Instead of putting in the maximum 10%, I'm putting 5% in the government fund (which is averaging around 6% annual return), with the other 5% going into my S&P fund. Then, I augment the S&P fund with any bonuses, spare cash and other income that isn't needed for other purposes.
On my 65th birthday I'll get access to my government fund, and my S&P fund I'll get access to somewhere between my 64th and 69th birthday, or something like that, depending on the market at the time.
Once I retire, I'll be transferring the S&P fund into something less volatile - not sure what this will be. I also have a property portfolio which might be the recipient of the funds, or some other slightly more stable asset class that will protect me from the downside in my retirement.
Hope this helps.
