Advisory Column: Retirement planning for the pending retiree
I would love if you could write on retirement planning in Jamaica. I am seriously thinking about this topic as I am about five or so years away from this stage of life, assuming I work until 65. In particular, how does one calculate how much money is needed to retire? I see a lot of articles on the internet talking about retirement planning in the US, but don't see that in Jamaica. My husband is retired and has a small pension and we have some investments but I'm not clear about how to calculate living on a fixed income for the next 20 years. Thanks in advance for your help.
The retirement planning process is not significantly different in Jamaica from that in the US or elsewhere. What differ are the instruments available for building the resources to support retirement and the legislative framework.
Although there are standard ways of calculating how much is required to fund a retirement lifestyle, there are so many uncertainties and change is so constant, it is hardly likely that the required sum can be accurately calculated.
Only about 10 per cent of Jamaicans are members of formal pension arrangements so many retired persons live without a formal pension. Savings and investments no doubt account for a fair share of the income used to fund the retirement of such persons. Countries like Canada, for example, have several options, some with favourable tax treatment, for saving for retirement.
But it is encouraging that retirement planning is assuming greater importance here and the fairly recent legislation which allows self-employed persons or persons employed in a non-pensionable post but are not members of a registered superannuation fund to save for a pension, in spite of its limitations, is a step in the right direction.
More education is required to help the public to capitalise on the other limited options available to save for their retirement years. Employers, in particular, must take a leading role in helping to equip their valued employees to plan for retirement. The one-time retirement presentation is just a first step.
In Jamaica, persons can expect to derive retirement income from their company pension, National Insurance Scheme benefits and their own savings and investments. This suggests that it is critical to start saving and investing for retirement early to stand a fair chance of having enough for retirement and thus reduce the risk of retirees outliving their funds.
Calculating how much is needed to support life in retirement can be quite intimidating and thus it is advisable to consult a competent financial services professional for assistance. The result will depend heavily on the assumptions made and, in any event, they are subject to change, sometimes radically, as personal circumstances, laws, and conditions in the economy change. We can hardly say with any modicum of accuracy what will happen next much less what will obtain by the time we retire.
Any calculation of how much will be required for retirement should take the following into consideration: the expected life expectancy and the retirement age of the person, expected retirement lifestyle and its cost based on current and projected costs, the projected inflation rate from the present to the retirement date and beyond as these impact cost, expected pension benefits, current and projected savings and investments and their rate of return.
It is also important to know the lifestyle the future retiree plans for. Generally, though, the rule of thumb is that retirement lifestyle expenses should be 70 per cent to 80 per cent of pre-retirement expenses. It is also likely that the first 10 years in retirement will be the most active ones but that the later years, though less active, will be more costly due to deterioration of the human body.
Any projection of how much it will cost to live during retirement can be made easier if there is a current budget, which should provide the basis for making projections about the retirement budget. Once the future annual cost of the retirement lifestyle is calculated, a determination is made of future pension income, if there is a pension, but some persons could have alternative sources.
Thereafter, it is necessary to calculate the gap between the projected retirement income and expenses and then how much more should be saved or invested in today's money to close any shortfall at retirement. These calculations require the use of present values and future.
If the calculations indicate a shortfall between retirement income and expenses, appropriate decisions can be taken. They include saving more during the pre-retirement period, retiring later, if possible, to extend the period of saving, settling for a lower retirement income, increasing portfolio risk to raise the chance of improving returns, or combining some of these options.
Fixed pensions inevitably lose much of their purchasing power as price levels increase over time. Effective budgeting can help but only for a time. Eventually, the retiree's standard of living will decline, but some form of protection may be derived from other sources of income such as investments or part-time employment.
At the end of the day, though, it is incumbent on individuals to take responsibility for their own retirement and for planning for it.
n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. firstname.lastname@example.org