You can build a very decent investment portfolio in a quarter of an hour if you make the second and third pension pillars work for you.
With all the information noise around the pension pillars lately, we tend to forget the basics. Instead of pondering whether or not to take out the second pillar money, think about whether you want to save for your future. If you do, it’s wise to look beyond the information noise.
Pension pillars are just great investment products with a tax advantage
Whether you are a beginner or an advanced investor, use the second and third pillar tax incentives before looking for other investment opportunities. Don’t be distracted by the “pension” label on these products. Assuming you choose a low-cost index fund, you will simply get a very good long-term investment product.
You can take some or all the pension money out when needed – either before or after reaching retirement age. The comparison with the first pillar is, therefore, in my opinion, inappropriate because the state will never pay you your entire pension at once. Still, with the money saved in the second and third pillars, you can do what you think is right.
Choose a low-cost index fund. Don’t be fooled or intimidated into a high-cost fund.
Unless absolutely necessary, do not rush to take out the assets collected in the second pillar. This way, you would leave a whole one fifth to the state as income tax and lose the opportunity to earn a return and win on taxes for ten years. If the need arises, you can withdraw money later at any time, but once you have left the second pillar, you will not be able to return to it.
If you haven’t optimised your second and third pillars yet, do these things today, it only takes 15 minutes.
The Laura’s Journey to Wealth chapters will have served their purpose if, after reading them, you feel more confident about saving money.
My simple and time-saving investment strategy
Laura is a fictional character, but my real-life investment strategy is similar to hers. These three investments are the core of my saving portfolio:
- 2+4% of my salary automatically goes to a low-cost second pillar index fund every month. My money goes into Tuleva World Stocks Pension Fund.
- 15% of my salary automatically goes to a low-cost third pillar index fund. My money goes to Tuleva Third Pillar Pension Fund.
- If I have money left after my monthly expenses, I buy more units in a global index fund. I chose a Vanguard fund called the FTSE All-World UCITS ETF (abbreviated VWRL), but there are other good options.
Are there any good alternatives to Tuleva? There are in the second pillar: SEB Pension Fund Index 100 and LHV Pension Fund Index also have reasonable fees, but don’t confuse them with SEB’s and LHV’s old funds. In the third pillar: LHV has a low-cost index fund, LHV Pension Fund Index Plus.
Wouldn’t it be reasonable to transfer second pillar assets to a pension investment account? From what I know today, I don’t think so. The costs of a pension investment account are much more difficult to monitor. Too little of your income goes to the second pillar to waste time trading and comparing.
Saving in Tuleva has one major advantage: we don’t have to choose between bad, high-cost investment products.
If you haven’t optimised your second and third pillars yet, do these things today. It only takes 15 minutes. Not tomorrow, not next month, or when you go on vacation.
- Direct your second pillar contributions and accumulated assets to a low-cost index fund.
- Choose a low-cost third pillar fund and set up a standing order in your online bank. Use the calculator to find the monthly contribution that saves you the most on taxes. If this is too much at first, start with a much smaller amount – you can increase, reduce or suspend your monthly payments in the future as necessary.
- Optional step: If you have used up the third pillar tax-free limit but you want and can invest more, open a growth account at LHV, for example, and look for a broad-based ETF where you can invest more money in the future.
If investing is your hobby, keep a small portion of your money to trade in your favourite assets. If not, spend your time on what interests you instead.
Chapters of the article series Laura’s Journey to Wealth: