The impact of pension poverty — how to avoid the trap
PENSION poverty refers to inadequate retirement income. Unfortunately, in Jamaica many senior citizens’ only source of income in retirement is from the National Insurance Scheme (NIS).
This has proven to be insufficient to meet basic needs. Earlier this year the plight of a retired security guard was brought to the nation’s attention. After working for 26 years as a security guard his monthly pension is $8,400. With poor eyesight and failing health, he is a victim of pension poverty. He was not able to fund his medical needs or meet his dietary requirements. It’s very important that the younger generation be encouraged to start saving for retirement from the very first pay cheque. Habits formed early are hard to break. Developing good money habits early can prevent the younger generation from facing poverty in old age. Planning for retirement should be as important as planning for other goals such as purchasing a house, buying a car, financing an education plan, etc.
Studies show that in the United Kingdom (UK) nearly two million pensioners are earning less than 60 per cent of the average UK income. In an era of high inflation, many pensioners globally are at risk of pension poverty. The UK Poverty Report 2022 revealed that poverty levels in the UK are rising. Poverty among females is rising at a faster rate than among males. Also, the poverty rate for retired females in the UK is higher than that of males as females are living longer, made fewer social security contributions, and have a history of more wage gaps when compared to males.
How far will your pension stretch in retirement?
The OECD Pension at Glance 2021 report revealed that the income poverty rate is high among senior citizens and even higher for retirees above age 75. Of those aged 75 years and older, 28 per cent have income below half the median household disposable income. The median income is the income amount that splits a population’s income into two equal groups. One group earns income above the median amount and the other earns income below the median. The majority of the elderly affected by income poverty are women. Locally and globally, social security benefits have not proven to be sufficient to stave off income poverty. It is, therefore, important that working adults and seniors who are still employed contribute to a pension plan and invest so as to supplement their pension income for retirement.
There is a common phrase “Time waits on no man.” Individuals who wait too long to plan for retirement often say “I should have done this years ago.” How can you avoid income poverty or pension poverty? Firstly, examine where you are now financially and determine your goals for the future. How will you get there? Having an experienced and trusted financial advisor is key in planning for retirement. How much funds will you need in retirement? Do you currently contribute to a pension plan? If you do, are you in a position to increase your contributions?
What about your investments? Is an emergency fund in place should any unforeseen events occur? Always plan for emergencies.
Please note that emergencies do happen. You may not know when an opportunity or a crisis will occur, but be sure to plan for them. It is best to plan and not have an emergency than not to plan and have one. Aim to have a minimum of three to six months of monthly living expenses in a low-risk and high-interest savings account for emergency needs. Keep reviewing your saving goals, Don’t despise small amounts; they add up and compound over time. Do you have longterm investments? If so, keep adding small amounts to them regularly. Add lump sums too, when possible. Have a diversified investment strategy. Delay retirement if necessary. Make time your friend.
Time is a precious asset that is needed in order to grow your retirement nest egg. Plan to have streams of income in retirement. Income can be from home or property rental, private or government pension, social security, freelancing or part-time employment, property sale investment in equity and bonds. Aim to replace at least 80 per cent of your pre-retirement income (80 Percent Retirement Rule). If this is your last year before retirement and your annual income (pre-retirement income) is $2,000,000 then your minimum retirement income is $1.6 million per annum. If you plan a life of leisure and travel in retirement, you may need to consider replacing 90 per cent or 100 per cent of your pre-retirement income. Inflation is another factor to ponder when determining the desired retirement income. Avoid the pension poverty trap.
Grace G Mclean is financial advisor at BPM Financial Limited. Contact her gmclean@bpmfinancial. and visit the website: www. bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com