Tue | Jul 27, 2021
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER

Oran Hall | Getting ready for retirement

Published:Sunday | June 6, 2021 | 12:08 AM

Retirement is a life-changing experience, but how the retiree copes is up to each person. It can be frightening and stressful, but it can also be rewarding and fun. Ultimately, preparation is the key. We will spend some time looking at how...

Retirement is a life-changing experience, but how the retiree copes is up to each person. It can be frightening and stressful, but it can also be rewarding and fun. Ultimately, preparation is the key.

We will spend some time looking at how preparation can be made to make it less intimidating and more fulfilling, for there are many decisions to be made before and during retirement.

There are two basic types of pension arrangements: the defined benefit plan and the defined contribution plan.

For defined benefit plans, there is a prescribed formula which states very clearly how the annual pension will be calculated at retirement. Two important considerations are the years of pensionable service and pensionable salary. Employers are responsible for the payment of the agreed pension, so it important for them to generate the required returns on their pension portfolio.

In the case of the defined contribution plan, the size of the pension is not guaranteed: it is determined by the value of the pension contributions and the returns on them. Some arrangements allow for the topping-up of pensions if the returns on the funds fall below certain prescribed levels.

Regardless of the type of pension arrangement, the employee should get an indication from the human resource department, for example, of how much the pension will be some time before the retirement date.

The employee has the option of taking a lump sum equivalent to 25% of the full pension amount and a reduced monthly pension payment. The employee opting to exercise this option should get an indication of the size of the lump sum and plan how it is to be used. Care should be taken not to fritter it away.

Considering that the pension is likely to be less than the salary earned during the working years and that benefits that come with a job are likely to go, it will become necessary to recast the budget. There are also likely to be changes in spending, and this should be reflected in the new budget. These changes can cause adjustments in lifestyle.

The employee should also determine if membership in the company’s health plan will continue in retirement. If that coverage is to be lost, arrangements should be made for the provision of health insurance coverage.

The National Insurance Scheme, NIS, has benefits which, though not very significant, can be helpful. Check with the NIS office to ensure that all payments are accounted for. Where there are discrepancies, they should be resolved, perhaps with the assistance of the employer.

Seek knowledge on all available benefits. For example, all pensioners on the NIS are eligible for benefits from the NI Gold Health Insurance Plan. Members are not required to make a contribution but have access to several benefits.

It is also important to apply to become a member of the National Health Fund if that is not already the case. Members are not required to make contributions, but the plan provides drugs for a specific list of chronic conditions.

The Jamaica Drug for the Elderly programme is another facility to access. It provides a 100 per cent subsidy for specific drugs covering specified chronic illnesses for all residents of Jamaica over the age of 60.

Where there are debts, it is advisable to settle them as much as possible before retirement begins considering the likely reduction in cash flow.

The onset of retirement introduces another need to make a change to investment strategy. The last 10 years or so before retirement require a change from accumulation to consolidation, meaning a shift from capital appreciation to capital preservation. Thus, interest-bearing instruments assume more prominence in the investment portfolio.

Retirement is generally the net spending phase of the life cycle, so it requires an even greater emphasis on capital preservation and regular income as well as liquidity to provide funds for any emergency that may arise.

It is also important to source pre-retirement counselling, a service provided by some employers, to help new retirees transition to their new reality. Mental preparation is as important as financial preparation.

People preparing to retire should decide what they will do with the extra time they will have on their hands. Will they spend more time on hobbies, travelling, volunteering, or on income-generating activities, for example? How else will they keep their minds engaged?

Joining support groups should be included in the plan for retirement. The Caribbean Community of Retired Persons is an excellent group in which to become engaged.

Retirement is a milestone. It is one to be celebrated. Plan a celebration even if your family and friends do plan one for you; acknowledge the transition – a new phase of life.

A sudden transition can be destructive. Having a good plan for retirement is key to making that transition smoothly and to having a rewarding retirement experience.

- Oran A. Hall, author of ‘Understanding Investments ‘and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel.finviser.jm@gmail.com