Retirement planning for two

Published: Sunday | February 10, 2013 Comments 0

I saw your column in The Gleaner and wanted your advice on personal financial planning for two - my mother, who is 58, and myself, 38. She has roughly seven years for retirement and I have 27 years. We want to have local income-producing assets now to provide for our financial security in the future, something that can give a monthly cash flow of J$100,000. Do you have any suggestions?

- Rhoan

FINANCIAL ADVISER: You will need two retirement planning programmes one for yourself and the other for your mother. As two distinct individuals and with such a difference in age and needs, that seems to be the best way.

Your mother is seven years from retirement; I hope she has a relatively good pool of savings. You have not said if she is a member of a formal pension arrangement, in which case she would need a complementary retirement fund. If she is, then her situation is not necessarily dire.

If she is not, it is going to be very challenging for even persons who get a pension have challenges in their retirement years.

What are the options open to her? She can consider extending her working life if she has the physical capacity to do so. This does not necessarily mean continuing in the employ of somebody else. She can begin to think of any skills or interest that she has that can become a reliable source of income when that time comes.

If she does not have a good pool of savings and investments now, she will just have to do all she can in the circumstances to save like it is going out of style.

It is possible she could experience a fall in her standard of living. If she has generally been spending carelessly, she could trim her spending without seriously impairing her standard of living.

little room for risk

Your mother has very little room for risk, so she must be cautious and retain all the income she can by seeking out savings and investment instruments that do not attract tax.

For yourself, there is more time; it is better to be late than never. If you have not started a retirement savings programme as yet, you have at least 20 years to accumulate a retirement fund.

You have not said what financial instruments you own, if any, but if you have life insurance, depending on the type of policy, you could have a retirement fund developing from that part of your portfolio - free of tax at that.

I cannot promise you that you will find great rates on fixed-income securities. Most tend to give a return that does not even match the rate of inflation, effectively yielding a negative return.

There goes your purchasing power. Managing your funds to get tax-free returns will cushion that blow. The long-term savings account offered by many financial institutions provide an option.

Each of these contracts must be maintained for five years and you cannot save more than $1 million dollars per year. Additionally, you cannot collect more than 75 per cent of the annual income that you earn on those instruments if you are to enjoy the tax benefit.

If you are not a member of any pension arrangement, you can participate in an approved retirement scheme even if you are self-employed.

It offers great tax benefits: the portion of your income that is contributed to it is not taxed and the income it earns is not. But bear in mind that these schemes incur expenses and not all of them generate satisfactory yields. Many companies offer them, so select carefully.

Having a formal pension arrangement in place does not obviate the need to have an additional source of retirement funds.

It is good that you have a monthly income figure in mind for yourself and your mother. That, though, is a function of how much you have to save and invest, the rates available, and the tax treatment of the income.

Bear in mind that as inflation reduces the purchasing power of your income, you will need a higher level of income to maintain your standard of living.

Your protection against inflation is investment instruments such as stocks and capital growth unit trusts but it is possible you could have no interest in them at all. After all, they are more risky than interest-bearing securities.

It is good that you and your mother are considering the prudent course of saving for retirement. Once started, stick to the course.

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






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