Oran Hall | Investing For retirement
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
QUESTION: I think I have reached the stage of my life where saving/investing for retirement has become of importance because that is all I have been thinking about since late last year. Maybe it is because of the change of my age. I do not know. All I know is that I need to be financially better. For example yesterday I found myself researching on investments, the stock exchange to be specific. That is how I know about you through the article "Understanding how the stock market works" dated December 12, 2010. I am so confused and in need of some advice. – Krystal
FINANCIAL ADVISER: It is good to think about and plan for retirement. I do not know your age, but it is better to start late than not start at all. Of course, the earlier you begin, the better it is as starting late requires directing more to your retirement investment programme to build sufficient resources to fund your retirement years.
It seems reasonable to assume that you are either self-employed or work in a setting in which there are no formal arrangements for you to receive a pension in your retirement years.
If you have been contributing to the National Insurance Scheme, NIS, you can look forward to some benefits which, though not significant, can be quite useful. Benefits include an old age pension and grant and NI Gold Health Insurance. There is also the Jamaica Drugs for the Elderly Programme, JADEP, for Jamaican residents 60 years old and over.
You can build a pool of retirement savings by participating in an approved retirement scheme and by creating your own investment portfolio. You need not worry too much that your knowledge of these matters is limited now. You can learn over time beginning now and it is good that you have been doing research and have sought guidance.
Approved retirement schemes, or ARS’s, are offered by many financial institutions: credit unions, life insurance companies and stock brokerage companies. Scheme members may contribute up to 20 per cent of their annual income up to the time of their retirement. Employers may contribute on behalf of their employees up to 10 per cent of the employee’s income. The employer does not have to match payments made by the employee, and the combined contribution of employer and employee must not exceed 20 per cent of the employee’s income. Contributions may be made monthly, quarterly, semi-annually, or annually and each member must make at least one contribution per year.
Contributions are not taxable, so they are deducted from income before tax is applied. All earnings on the contributions accumulate tax-free in the scheme, but taxes are paid on the income the pensioner receives during retirement. The earnings on the contributions are not guaranteed as they are determined by the market.
Where possible, contributors should opt to have their funds invested in investment funds that have a risk profile that reflects the level of risk they are comfortable with.
Upon retirement, ARS members can take up to 25 per cent of the value of their contributions and the interest earned on them as a tax-free lump sum cash payment, and the balance must be used to purchase an annuity or another approved income plan. An annuity is a series of payments for a specified period of time.
The accumulated value can also be used to purchase an annuity for a member who becomes permanently disabled at any time prior to retirement and the value of the contributor’s portion of the fund is payable tax-free to a named beneficiary if the member dies before retirement.
Contributors are not allowed to withdraw funds from the scheme before retirement, but they can transfer from one ARS to another ARS, or to a superannuation fund in the event that their new employer offers that facility.
You can make additional preparation for retirement by creating an investment portfolio. I recommend unit trusts. They market a wide variety of investment funds to meet the investment objectives of investors. Because they are usually quite diversified, they offer a reasonable level of protection against risk. Those that invest primarily in interest-bearing securities give the best protection against risk but the lowest returns. Those that invest for growth, in stocks and real estate, for example, tend to give the best returns but can give the worse returns because they are more risky. A fund which includes more than one type of security would likely be best for you. You may also choose to invest in more than one fund in the same unit trust and in more than one unit trust but note that returns on unit trusts are not guaranteed.
Invest more of your time in doing your research but focus on the approved retirement schemes and the unit trusts, both of which are managed by professionals, thus relieving you of the burden of directly managing your funds. Keep calm and arrange your financial affairs such that you will be able to save consistently for your retirement.
Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.