All the articles on retirement and pictures of people in retirement seem to suggest that many of your days will indeed be spent lying on a beach, or taking some dream cruise. Isn't everyone's dream that of a secure and comfortable retirement? The question is: How do you make that your reality? How do you chart your course?
The reality is of course that most people do not have a comfortable retirement because most people do not plan for it.
Retirement creeps up on most of us, catching us in a state of general financial unpreparedness. How many people think of retirement as that period of life that has to be financed by 45 years of working? How many people realise that life expectancy has increased? Gone are the days when you retire and then
you die.
Planning for retirement involves four essential elements:
1. How much money will you need?
2. Where the money will come from?
3. How much time do you have to save to build your nest egg?
4. How much risk are you
prepared to take?
HOW MUCH INCOME
WILL YOU NEED?
As a rule of thumb, it is the conventional wisdom that you will need about 70-80 per cent of your pre-retirement income to maintain a similar lifestyle in retirement. This is because you will have lower family expenses, although quite often, parents have to help their children even in their retirement years. The family home will by now be mortgage-free and that will be one less expense that you will have to meet. However, it is quite likely that medical expenses will increase.
The difficulty most people have is to estimate how much they will have to save to provide adequately for those retirement years. Assumptions about future inflation and future investment returns have to be made in order to estimate what the future value of your retirement fund would be.
When the inflation figures for the last 20 years are examined, inflation was found to be very high on average 20 per cent. In recent years, the trend has been lower, and so it seems reasonable to assume a lower trend for the next 20 years. Let us assume that inflation will be 12 per cent, over the next 15 years.
WHERE WILL THE
MONEY COME FROM?
Of course your resources for retirement should come from many sources. Typically some sources are:
Real estate Excellent hedge for inflation in Jamaica as well as can be used for rental income.
Company pension This is a major source of retirement income, however, pension payments are rarely increased to match inflation.
Other investments Another source is dividends from shares which are tax free. Equity provides an excellent hedge against inflation. As well, interest income from your fixed-income investments is also a good source.
HOW MUCH TIME AND RISK?
There is no time like the present. The earlier an individual starts building his nest egg the better. Small amounts invested over long periods of time tend to be more effective than starting later with larger sums.
Time and risk are linked. The conventional wisdom is that the longer you have to build up retirement savings the greater the tolerance for risk. Because amounts will be invested for a long time, the choice of assets selected needs to be of the type that hedges inflation.
Select your assets carefully as this will have a great impact on how successful your investments will ultimately be.
Contributed by Barita Investments.
