Saving for retirement

Oran A. Hall, Contributor

QUESTION:

I read your article in last Sunday's paper which stimulated my desire to take a step towards saving for my twilight years. I am a 41-year-old self-employed professional and would like some direction in how that can be done.

- Dionne

PFA: At your age, you are still in the mid- career phase of your life and, if all goes well, you should see your income increasing as you advance in your career. One of your main investment objectives from here on should be tax minimisation. But let us begin at the beginning.

It is important to have a fairly good idea about when you intend to retire to help you determine how to structure your programme.

Decide also how you would like to live in retirement so you can make comparisons with your current lifestyle and project what your retirement lifestyle will likely cost.

Take a very careful stock of your current financial situation to determine your net worth taking particular care to see what your investment portfolio looks like. It is the key to how your life will be in your retirement years.

operate on a budget

If you do not operate on a budget, now would be a good time to start doing so. It is the surest way to set up a structured savings programme.

Stick to your plan; establish an emergency fund so that you will not be tempted to dip into your savings and your investment fund when unexpected circumstances come upon you.

As a self-employed person, you are eligible to open an approved retirement scheme account (ARS). Several financial institutions, for example, credit unions and life insurance companies, offer them. You may deposit up to 20 per cent of your annual income into your ARS.

That portion of your income is not taxed and there is the added advantage of income earned on it while it is in the scheme not being taxed, so pay as much as you can into the ARS. These are very significant benefits. You will be required to pay tax on your pension when that time comes.

There are other ways to set up a tax-efficient plan. Unit trusts recommend themselves. Gains on investments in the growth funds are not taxed. Gains on investments in those funds that invest primarily in interest-earning securities are not taxed if the investment is for at least five years.

These funds are managed professionally so you should not have any worries monitoring them and they further give much scope for diversification and risk reduction.

Ordinary stock is another option but that depends on whether you have the capacity to take that level of risk.

Bear in mind that inflation poses a serious threat to your standard of living but note that the investments that give the best protection are the most risky ones. Life insurance not only gives protection to your dependents but it may be a source of tax-free income as well, depending, of course, on the type of policy.

This is the period when you can best take an aggressive investment stance. At age 55, if you plan to retire at 65, you will enter the pre-retirement phase of your life when you will need to take a more conservative investment stance. Seek professional guidance, if need be, to put a workable plan in place.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of "The Handbook of Personal Financial Planning", offers free counsel and advice on personal financial planning. finviser.jm@gmail.com