- FilePreparing for retirement requires making provisions for an adequate and reliable stream of income to support your lifestyle.
Sandra Shirley, Contributor
HOW FAR are you from retirement? Is there any special dream that you would like to realise in your retirement years? What level of income are you likely to have then and can you make it better?
Most of us put off saving for our retirement until it is almost upon us. It is often difficult for us to entertain discussions about retirement planning until some time in our mid-to-late forties, or even later.
Industry analysts report that on average we change our jobs every 4-7 years. Those among us who are fortunate to be members of an approved pension scheme will find that very few schemes provide for vesting prior to reaching retirement age. As such, employees must face having to either remain in a disgruntled position with an employer, becoming more demotivated; or face leaving with only their share of pension contributions plus accretions.
The company's portion invested in the scheme on their behalf stays behind to the benefit of the remaining membership. This reality is made more serious since the money so received is seldom reinvested in another retirement plan.
In fact, many of us have become so accustomed to having our portion of accumulated pension contributions paid over to us when we change employers that we forget its real purpose. It is customary for retirement savings to be included in financing for new furniture, a new car or other consumer durables. Consequently, many retirees are relegated to eking out a living either on pension savings garnered during the final stage of their employment, or on National Insurance, supplemented with donations from family and friends. Needless to say, such persons frequently end up having a quality of life that is significantly below their own expectations or desires.
Purpose
But now that we are thinking of it you can better appreciate that it does not have to be that way. The important matter to first consider is the purpose of retirement planning. Most of us earn our livelihood by working and for most of us too, that earning ceases at age 60 although some persons retire at age 55. Unfortunately, intervening circumstances such as mental or physical incapacity, brought on by unforeseen life experiences, may result in an even shorter work life for some persons. The bottom line in any event is that our need for income does not end at retirement even though in some cases our spending needs change. For instance, most mortgage payments are structured to ensure that the obligation is settled ahead of retirement. By that time also, the children, in most cases, would have completed their education or would have assumed direct responsibility for their own welfare.
But while some expenses may reduce, others like medical or household expenses may actually increase due to changing circumstances or simply because of inflation.
The key therefore, is to prepare yourself to ensure that there is a reliable and adequate income stream to support your living expenses and lifestyle after retirement. In this connection there is one fact that we both can readily appreciate: a dollar today is worth more that one tomorrow. In other words you can purchase more with any sum today than you can with the same amount in the future. This is where retirement planning can add significant value. The difference in the purchasing power of money over time is caused by the effect of inflation, which effectively reduces the value of money. The remedy for inflation is to invest in a medium that preserves the value of your money by generating a yield or return that is at least equal to the rate of inflation. These may include savings instruments offered by deposit-taking institutions, money market instruments, government or corporate bonds, local registered stocks, real estate and the stock market. These alternatives carry different levels of risk, reflected in the rate of return offered. Usually the higher the risk the higher the return. Your choice of saving or investment alternative will be determined by factors including the amount you have to invest initially or from time to time; your horizon or period of the investment; your objective or what you hope to achieve at the end of the period; and how much risk you are prepared to take (your risk appetite). These alternatives are seen at best as supplements to your approved pension although, admittedly, some persons who do not belong to a formal pension plan make such investments with a view to generating income flows to cover their living expenses after they retire. On the other hand, many persons have come to consider their membership in an approved retirement plan as merely an avenue to tax-free savings, forgetting its real purpose of providing a reliable income stream in their post retirement years.
The White Paper on pension fund reform in Jamaica embodies legislation that was set in motion primarily to create a broad-based regulatory framework for improvement in the provisions and level of protection available for participants in pension funds. For instance, the legislation provides for the regulation of pension fund managers and sets guidelines for investing of pension contributions. There is also provision for creation of Personal Pension Plans (PPP) to supplement an existing plan or provide the only true pension arrangement for self-employed individuals and some professionals. There is also an expectation that accommodation will be made for persons wishing to plan a retirement income for a dependent parent who is without a pension.
Of significance are the provisions providing for vesting after five years and portability of pensions which have remained sticking points for some union representatives and therefore have added to the long delayed passing of the legislation. The shorter vesting period is significant as it allows for the "cementing" of your interest in the pension plan prior to retirement or at an earlier time in the case where your pension plan provides for vesting after say, ten (10) or twenty (20) years of continuous service. Vesting entitles you to both your contribution and that of your employer.
Similarly, portability facilitates the movement of your entitlement in your existing pension plan to another formal pension plan when you change your job.
The main argument proffered by trade unions against the proposed vesting and portability provisions of the White Paper is that the freedom members now have to decide what they do with their pension contributions will be removed. Remember the consumer durables mentioned above? Is this really what you want to do with your pension? And what if you aren't able to replace the funds? Is the satisfaction you receive from these present acquisitions worth the likely discomfort you will experience in your later years from inadequate income? Given the effect of inflation and the desire to maintain the lifestyle of your choice or that you are accustomed to, it is not only advisable but sensible that you begin your pension programme or to begin saving toward your post-retirement years as soon as possible.
Sandra Shirley is Senior general manager, NCB, Wealth Management Division.
