Introduction
In Mexico, with only 42.2% of individuals aged 18 to 70 having retirement savings accounts or Afores, and many working independently without employment benefits, planning for a dignified life after 65 is crucial. Two popular options to complement retirement savings are Personal Retirement Plans (PPR) and self-managed investments. This article explores the pros and cons of each to help you make an informed decision.
What are Personal Retirement Plans (PPR) and How Do They Work?
Natali Lagarda, a retirement savings and retirement advisor, explains that both PPRs and alternative investment schemes are legal and viable. Properly managed, they can generate significant returns. However, their distinct features make them suitable for different types of individuals.
A PPR is a private, retirement-focused plan that aims to multiply your resources over the long term based on the investment schemes you choose and their associated risks. The main advantage is attractive tax benefits.
- You decide the investment term, amount, frequency of contributions, investment instruments, and risk management plan.
- PPRs can include complementary policies like life or disability insurance, though these are not mandatory.
Lagarda notes that PPRs require less time and attention from investors, as the monitoring and management are handled by the insurance company or financial institution. They also offer tax benefits, such as no income tax retention and the possibility of deducting Value Added Tax (VAT).
However, PPRs charge management and administration fees, which can be high if not compared correctly among available retirement plans. Early withdrawals result in penalties from financial institutions and tax withholdings for early termination.
Alternative Investment Models
Besides PPRs, you can invest through brokerages or with a financial advisor to create a long-term investment portfolio. However, consider the following details:
- These models require more active administration from the saver, demanding greater knowledge of market movements to make optimal decisions and handle potential losses.
- Alternative investment plans do not offer tax deductions, and the funds at the end of the term are subject to income tax rates up to 35%. Additionally, commissions are charged, similar to PPRs.
- The advantage of these schemes is the flexibility to move funds as desired, no obligation to contribute a specific amount regularly, and customizable timeframes.
They tend to be more aggressive in risk, while PPRs are generally less so, or you can choose otherwise.
Daniel Urías, founder of Cooltura Financiera, highlights that these investment schemes allow for liquidating resources in any situation. However, be aware of potential market downturns that could reduce the value of your investments.
Which Yields Better Returns?
Both schemes have advantages and disadvantages, charging fees for advisory and management services. The choice depends on your risk tolerance:
- Low-risk PPRs offer more conservative returns, while high-risk PPRs have the potential for higher returns.
- Similarly, alternative investment schemes’ performance depends on the chosen portfolio and your needs.
Urías emphasizes that self-managed investments require understanding the associated costs compared to PPRs and recognizing if you are organized and knowledgeable enough to maximize returns through brokerages.
“Most people aren’t at the level of daily market monitoring and making precise decisions with certainty over a 20-year horizon. Decide based on your personal situation, knowledge level, seek good advice, and compare options,” Urías advises.
