How to prepare for retirement in Brazil with low interest rates.

Luciane Macedo _247 - What will Brazil be like in ten, twenty, or thirty years? Will we live longer than we imagine? Nobody has these answers. But if Brazil is indeed moving towards having very low interest rates, as is practiced in developed economies, and if, with increasing life expectancy, we tend to live (and consequently work) longer, then it's time to start preparing for retirement within realistic projections.

One thing is certain for those who intend to stop working someday: it's no longer possible to remain stagnant, "hatching the golden eggs" of a private pension plan. Given these two variables—falling interest rates and rising life expectancy—those who take control of their future as soon as possible have a greater chance of avoiding disappointment later on.

To retire with the amount of money you imagine to be a good and comfortable sum today, when we are still experiencing high interest rates on long-term investments, it will be necessary, among other measures (see below), to increase the value of your monthly contributions as interest rates fall, because with them, returns will also be lower. You may not know what tomorrow will bring, but you can plan and adopt an attentive and proactive approach to retire well, as you have always dreamed – or as close as possible to this ideal.

"The worst that can happen to someone who prepares for a scenario of very low interest rates, and then Brazil returns to having high interest rates, is that they find themselves, later on, with a millionaire retirement fund thanks to all the accumulated capital," comments André Massaro, financial educator at MoneyFit.

The fact is that, in addition to accumulating more, people will have to do so for a longer period. "To accumulate wealth, that will be the way; they will have to contribute more for a longer time, and eventually, people will even retire later," Massaro points out. "Few people will be able to afford to stop working, but they can have a more relaxed job if they do good retirement planning."

The educator also draws attention to the age range in which a large portion of Brazilians begin investing in a private pension plan. "Today, most people start contributing at 30 or 35 years old, but people will have to start earlier," advises the financial educator from MoneyFit. "They have to start with the first money they receive in their lives."

Look for the most attractive rates.

But even before evaluating your budget with a view to increasing the amount deposited monthly into your private pension plan, you will need to look at the costs of the investment.

The loading fee charged every time money is deposited into the plan can reach 5% -- that is, for every R$100,00 deposited, only R$95,00 is invested; the other R$5,00 remains with the financial institution to cover its expenses. "The loading fee is even more damaging than the administration fee; it eliminates the advantage of the entire product," warns Massaro.

Caixa Previdência launched new plans this month that are exempt from loading fees, giving clients the opportunity to increase their contributions at zero cost. Previously, only funds with values ​​above R$ 100 were exempt from the loading fee. The loading fee applied to withdrawals has also become more attractive in the new plans. The longer the investment remains invested, the lower the loading fee becomes upon withdrawal, potentially reaching 0%.

The administration fee, which is around 3% per year in the market, varies between 0,5% and 2% in Caixa Previdência's new plans. "For realistic planning, the administration fee should be less than 1%," recommends Massaro. "Today, we still have real interest rates between 3,5% and 4% per year," he points out. "But in a scenario with a more civilized real interest rate, something like 2% per year, any pension plan that charges an administration fee of 1% already compromises half of the real return."

To take advantage of the benefits of the new plans, valid for new clients, those who already have funds in Caixa Previdência must migrate to the new portfolios. It is also possible to transfer a retirement plan from one institution to another through portability, without administrative costs or income tax, provided that the plans are of the same nature – that is, from one PGBL (Plano Gerador de Benefício Livre - Free Benefit Generating Plan) to another or from one VGBL (Vida Gerador de Benefício Livre - Free Benefit Generating Life Insurance) to another. If you want to change from a PGBL to a VGBL, tax will be levied on the redemption.

More competitive products

The new investment funds from Caixa Previdência also offer more options to better suit different profiles. With interest rates falling, the pursuit of good real returns will have to include more risk than most people have become accustomed to over the years, riding the wave of high interest rates.

Private pension companies themselves will have to adapt to the new reality, offering not only attractive rates but also more competitive products. Most private pension funds invest their resources entirely or almost entirely in fixed-income securities. But in an economy with real interest rates that can even be negative, as happens in developed countries, investing in fixed income means, in almost all cases, having your money eroded by inflation. "There are few places where you can get real returns (above inflation) in fixed income with little risk," comments Massaro. One of them is still Brazil. But we don't know for how long, so the sector itself is already starting to take action.

"We've noticed a paradigm shift with the reduction in interest rates, and the industry is moving in that direction," observes Juvêncio Braga, director of Caixa Previdência. "The trend is for clients to have increasingly more asset options to build their private pension plan, always seeking greater diversity as interest rates decrease."

According to Massaro, people will have to learn to live with volatility and risk if they don't want to reach retirement age bankrupt or with much less than they expected. "A person might even achieve 8% per year, a return similar to what we have today, but you can't achieve that with fixed income; you have to go for variable income," indicates the financial educator. "Risk will be a part of life. In the long term, variable income tends to be the winner, but the path is full of bumps."

Generally speaking, the more time a person has until retirement, or the younger they are, the more emphasis they can place on variable income investments in their private pension plan. "That's because the more time they have, the greater the chances of selling stocks at a profit," explains Massaro. "If a person is close to retirement, they may have to exit their variable income investments during a tremendous stock market downturn," continues the financial educator. "So, the closer to retirement, the more risk-averse they should be."

But this balance between fixed and variable income, over the years, is something the plan holder will have to review from time to time. To change the profile of their private pension investments, increasing or decreasing their position in stocks as good opportunities arise in the stock market, it will be necessary to be at least minimally well-informed. As interest rates fall and fixed income becomes increasingly less attractive, those who do not know how to properly balance the risks of investments will find their first and best ally in financial education.

"We will have to learn to live with low returns, high volatility, and more realistic planning, especially for retirement," notes the financial educator from MoneyFit. "The biggest risk for those who want security in the future will be precisely not taking any risks," concludes Massaro.

More affordable.

The new Caixa Previdência plans have also become more affordable. The minimum contribution amount has dropped from R$ 50,00 to R$ 35,00. This is a significant incentive, at no cost, to make contributions whenever there is any extra money that could easily be spent on consumption, and also an encouragement to save with a specific purpose: the retirement plan.

"We lowered the minimum contribution amount because we are seeing a growing trend among people who have disposable income and are concerned about the future," comments the director of Caixa Previdência. "People are realizing that they will outlive their grandparents and are worried about how to finance their future."

According to the 2012 Global Investor Opinion Survey conducted by Franklin Templeton, 60% of Brazilians surveyed said they save up to 15% of their income for retirement.

Concern about retirement and the habit of saving in the expectation of securing a peaceful future are also increasingly significant among social classes D and E, who are gaining access to pension and health plans with the increase in their income and job security.

The 2012 edition of the "Observer Brazil" survey, conducted by Cetelem BGN in partnership with IPSOS–Public Affairs, shows that social classes D and E spent more than class C on private pension plans last year: an average of R$ 59,00 per family, compared to R$ 51,00 in the emerging middle class.

Private pension plan contributions reached R$ 5,6 billion in March, a 38,48% increase compared to the same period last year, the best result for the third month of the year since 2008. The data comes from the National Federation of Private Pension and Life Insurance (Fenaprevi). Individual plans showed the greatest growth (43,41%), with contributions of R$ 4,9 billion.

"The strong expansion in revenue in March reflects the behavior of a greater number of investors adopting open supplementary pension plans for long-term savings and as a tool to plan for retirement," assesses Marco Antonio Rossi, president of Fenaprevi.

In the quarter, revenue was also significant, reaching R$ 14,8 billion, compared to R$ 11,7 billion in the first three months of 2011. Individual plans also saw the largest growth (27,53%), with R$ 12,6 billion in contributions.

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