Retirement: Afore, voluntary contributions and PPR
Your retirement is probably your biggest goal. How your Afore works, what voluntary contributions and personal retirement plans are, and why time matters so much.
If you work under IMSS or ISSSTE, you already have a retirement account: your Afore (Retirement Fund Administrator). Contributions from your employer, the government and you go there. But for many people, what builds up from those mandatory contributions alone won't be enough to keep their standard of living in retirement.
How your Afore works
- Your money is invested in a SIEFORE, a fund matching your generation (your birth year): the younger you are, the more weight in growth investments; as you near retirement, more weight in fixed income.
- Afores charge an annual fee on your balance, regulated by CONSAR.
- You can switch Afores; CONSAR publishes how often it's allowed and how to do it.
- Check your statement and sign up for the AforeMóvil app to see your balance and contribute.
Voluntary contributions
You can put extra money into your Afore whenever you want: from the app, in stores or by direct debit. There are several types: short-term (you can withdraw them after a while), long-term and complementary retirement contributions (only at retirement). The latter can be tax-deductible, within a cap.
Personal Retirement Plans (PPR)
A PPR is a retirement investment account offered by insurers, brokerages and fund managers. Contributions can also be deductible: in general, up to 10% of your income for the year, with a maximum of 5 annual UMAs. In exchange, the money must stay until retirement (generally age 65); if you withdraw early, you pay taxes and possible penalties.
Time does almost everything
With retirement, compound interest has decades to work. Look at what $500 a month does growing at a real rate of 5% a year:
| If you start at… | Years until 65 | You'd have roughly (in today's pesos) |
|---|---|---|
| 35 | 30 | $416,000 |
| 45 | 20 | $205,000 |
| 55 | 10 | $78,000 |
In the first case you put in $180,000 and compound interest did the rest; in the last, you put in $60,000 and it barely had time to grow.
How much will I need?
A simple way to think about it: many people aim for a pension of 60% to 80% of their income before retiring. CONSAR has calculators to estimate your pension with your current balance. If the gap is large, voluntary contributions and PPRs are the tools to close it.
Test what you learned
1. What is a SIEFORE?
- A bank
- The fund where your Afore invests your savings, by generation
- A tax
Show the answer
The fund where your Afore invests your savings, by generation. There's one SIEFORE per age group.
2. What is a typical condition of a deductible PPR?
- You can withdraw the money anytime at no cost
- The money stays until retirement; withdrawing early means paying taxes
- It has no tax benefit
Show the answer
The money stays until retirement; withdrawing early means paying taxes. In exchange for the tax benefit, the money is for retirement.
3. According to the table, what happens if you start saving $500 a month at 35 instead of 45?
- You end up with the same
- You end up with roughly twice as much
- You end up with less
Show the answer
You end up with roughly twice as much. About $416,000 vs. $205,000: time does almost everything.
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Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.