Your Future in Your Hands: Retirement Plan Guide

Your pension could be only 26% of your current salary. Would that be enough? Don't leave your future to chance. We explain step by step how to build a dignified retirement with a Personal Retirement Plan (PPR) , the tool that the SAT encourages for your benefit.

If you began contributing to the IMSS after July 1, 1997, you fall under "Law 97." This means that your pension will no longer be a guaranteed percentage of your final salary, but will depend exclusively on what you manage to accumulate in your Afore account. The problem is that the mandatory contribution (employee, employer, and government) is 6.5% of base salary, an insufficient amount to guarantee a comfortable retirement.

This is where a crucial concept comes into play: the replacement rate. It's the percentage of your final salary that you'll receive as a pension. According to the OECD, for many Mexicans under Law 97, this rate could be as low as 26%.

Think of it this way: if you earn 25,000 pesos a month today, your pension could be only 6,500 pesos. Could you maintain your quality of life with that? This is the reality that forces us to act and build a plan beyond the Afore.

A Personal Retirement Plan (PPR) is a private, voluntary investment account specifically designed for you to save long-term for your retirement, supplementing what you accumulate in your Afore. It works through periodic contributions (monthly or annual) that are invested in different financial instruments, such as mutual funds, stocks, or bonds. The goal is for your money not only to be saved, but to grow over time thanks to the power of compound interest.

Unlike Afores, where the investment strategy is general, PPRs offer more flexibility. They are offered by various financial institutions:

• Insurance companies: They combine retirement savings with life or disability insurance, offering protection and savings in a single package.
• Investment Funds / Brokerage Firms: Provide access to a wide range of investment options (ETFs, domestic and international stocks) for higher potential returns, albeit with greater risk.
• Banks: They also have investment products identified as PPR.

The choice depends on your profile: if you're looking for additional security and protection, an insurance company may be ideal. If you're comfortable with the markets and looking to maximize growth, a brokerage firm may be your best option.

The biggest incentive to open a PPR today is its incredible tax benefit, endorsed by the Income Tax Law (LISR). It's, in short, a way for the government to reward you for taking charge of your future.

Each year, you can deduct the contributions you make to your PPR on your annual tax return. This means you can subtract that amount from your total income, which reduces the base used to calculate the income tax you owe. The result: lower taxes or, in many cases, a tax refund.

The rule is simple: you can deduct up to 10% of your gross annual income, provided this amount does not exceed the equivalent of 5 Units of Measurement and Update (UMA) per year.

"A PPR not only builds your future wealth, but also returns money to you today. It's one of the few tools that allows you to reduce your tax burden in a legal and planned way."

Tax Savings Simulation with a PPR

• Gross Annual Income: $500,000 MXN (same with or without PPR)
• Annual Contribution to the PPR: $50,000 MXN (only with PPR)
• Deductible Amount (Art. 151): $50,000 MXN (10% of income, not exceeding 5 UMA, only with PPR)
• Taxable Income:
  • Without PPR: $500,000 MXN
  • With Contribution to PPR: $450,000 MXN
• Estimated Tax (30%):
  • Without PPR: $150,000 MXN
  • With Contribution to PPR: $135,000 MXN
• Tax Savings / Refund: $15,000 MXN (The SAT gives you money back!)

This example shows how, by contributing 50,000 pesos to your PPR, your taxable income decreases, resulting in a direct tax savings of 15,000 pesos. That's money that comes back into your pocket every year, just by saving for your future.

The second superpower kicks in at the end of the road. When you turn 65 and decide to withdraw your money, the income generated and a significant portion of the capital will be exempt from income tax, as long as you meet the legal requirements. This ensures that most of the money you accumulated over decades stays with you, not in taxes.

The answer is personal, but there's a general rule accepted by international organizations like the OECD: you'll need between 70% and 80% of your last salary to maintain a similar quality of life in retirement.

You can do a simplified calculation to find “your number”:

• Estimate your desired monthly retirement spending: Think about your ideal lifestyle. You may no longer be paying a mortgage, but you'll probably spend more on healthcare and travel.
• Annualize that expense: Multiply your monthly expense by 12. Example: $30,000/month x 12 = $360,000/year.
• Apply the 4% Rule: Multiply your annual spending by 25. This is the total capital you would need to have invested to be able to withdraw 4% each year without depleting your fund. Example: $360,000 x 25 = $9,000,000.

That's your goal. It seems like a huge number, but with decades of disciplined saving and the power of compound interest, it's achievable.

For a more accurate estimate, you can use the Self-Employed Calculator offered by CONSAR on its official website. It allows you to project your future savings based on your contributions and age. You can find it on the CONSAR website.

Retirement planning isn't just a matter of "when you have more money" or "when you're older." Thanks to compound interest, every year you delay starting your savings means hundreds of thousands of pesos less in your retirement. Taking control of your financial future is the most empowering decision you can make.

This article is for informational and educational purposes only and does not constitute personalized financial advice or recommendation. Financial product terms may vary. We recommend consulting with a certified insurance agent or financial advisor to assess your specific situation.