By Garth Simpson, Contributor
YOU DO not know how long you will live after retirement and finding ways to supplement your income is very important, especially when you are a few years away from retirement. A build up of reserve will provide a nest egg at that time. This is important because inflation will significantly erode your meagre pension income.
Many people hope to be financially and socially secure at retirement, but due to macro economic instability, this scenario remains only an illusive dream. A person who thinks that he can live on a pension after retirement is bound to a life of poverty.
PLANNING FOR RETIREMENT PROSPERITY
If you are not making the progress you would like and are capable of making, it is simply because your goals are not clearly defined. Paul J. Myer
The closer you get to retirement the more conscious you should become about your retirement planning. The money you will earn after retirement will not be enough to maintain the same standard of living.
A retiree living in Jamaica needs at least 80 per cent of what he or she was earning before retirement. In addition, an indexation to inflation. However, this is not so. The maximum pension allowed by law is 2/3 of your final salary, less allowances (if not a part of the taxable emoluments), at retirement. For you to earn the full pension, which is 2/3 of your salary, you would have to work 33 1/3 years with the company.
Let us say, you have contributed to the pension scheme for 10 years and you are about to retire. your final salary is about $650,000 and your allowance is 40 per cent of it. Believe it or not, your pension for the year will be equal to $78,000 when it is calculated!
When it comes to pension, it does not matter how long you have worked with the company and how generously you have contributed to the pension scheme. It may be a great pension scheme with a huge surplus.
Therefore, you may think that your life will be well off at retirement. But, you are dead wrong! You may be in for a surprise when you discover that your pension cheque is insufficient to meet your basic needs. If that is your only source of income, all I can say, is may God help you!
Your commitment to planning is fundamentally important to creating and preserving personal and organisational wealth. To achieve you must plan. Financial planning for retirement depends on our consumption pattern and our management of wealth within our disposal. A useful way to look at this is the life cycle approach to financial planning.
Generally speaking, people are consuming throughout their life time and even at death. However, we only work for a fraction of our life usually 33 years. Assuming retirement is 65 years and life expectancy is 75 years, then there is ten-year period of consumption without employment income. We evidently cannot consume all that we earn during our working life. We must invest some income during our working life to be spent during retirement.
Income tends to rise steadily over time while expenditure tends to peak in mid-life and taper off towards retirement. Understanding this life cycle is critical for planning for retirement.
The critical variables under control are:
Our labour or earned income.
Our expenditure or consumption behaviour.
Our savings behaviour; our investment; portfolio or wealth management.
How we manage these variables will determine the wealth we will enjoy in retirement.
Our objective is to enjoy the highest standard of living we can afford given our income budget constraint.
NEXT WEEK: Making the most of your pension plan
