Planning for retirement
IF YOU are in your 20s or 30s, perhaps retirement planning is not one of your priorities. However, if you are 40-something or older, you should already have a retirement plan in place, supported by tax-advantaged savings and a robust investment programme. The reality is that with modern medical technology, increased nutrition, health education, and better lifestyle practices, we are expected to live longer than our predecessors.
The World Health Organization’s life expectancy data, published in 2015, indicate that Jamaican males are likely to live to age 74 on average, while females will survive to age 79. But we know how averages are, some people will die earlier and some will live longer. Most of us hope to be in the latter group, right? Since we don’t know our death date, it behooves us to plan for the best-case scenario.
There are two main considerations to retirement planning – the psychological aspect and the financial aspect. Psychological considerations include our attitude towards leaving the world of work, job title and status, income and job associations, to a very different life. So, retirement planning is a journey, not a destination. Mental preparation should begin at least 10 years before the presumed retirement age to enable a smooth transition. People should comfortably raise a series of questions about their personal lives. The answers should result in conclusions about the status of family, friends and other support groups; hobbies, interests, and extra-work involvements; state of health; and hopes and dreams that will feature during the final third of a person’s adult life.
LOWER LIFESTYLE
Financial planning, on the other hand, should centre on funding the envisioned lifestyle when one can no longer work for an income. Financial planning has three components. First, one should set realistic, achievable goals, with timelines. Second, determine living costs and expenditures for planned activities and gifts. In this phase, one should factor in contingencies, since there are risks inherent in being alive, to include disability, illnesses, property maintenance, and the like. And third, a financial strategy to ensure that the plans can be realised and maintained for the remainder of life.
A large number of people retire to a lower lifestyle than they expected, not because they failed to plan, but because their plans were inadequate. Accumulation for retirement may have started late, or perhaps they were too conservative, or underestimated the devastating effects of inflation or sickness. Maybe an investment portfolio returned disappointing results – the reasons are many. There is no foolproof plan. However, there are measures that can mitigate the devastating effects of retiring without a dependable source of income.
Let’s be practical. If you had very limited income-earning capacity, it is likely you will retire with very little, unless there is a windfall from an inheritance or elsewhere. If you have earned a reasonable salary steadily over time, you are in a good position to plan and enjoy a reasonable level of comfort during the golden years.
Dependable retirement income comes from three main sources: the Government’s National Insurance Scheme (NIS) (for contributors), a company’s pension scheme or superannuation fund (for employed persons), and from personal investments. Whether you are a contract worker, self-employed, or employed, it is important to make contributions to the NIS to secure a retirement benefit.
In addition, self-employed persons are able to contribute, tax-free, the equivalent of 20 per cent of income to an individual retirement account. These accounts are offered by most banks and insurance companies.
Pension accounts are very different from savings accounts, with particular restrictions regarding contribution and withdrawals. Before entering into an individual pension arrangement, be sure the terms and conditions are thoroughly explained and understood. Your financial adviser will patiently explain the requirements and benefits, since saving for retirement is longterm, and requires consistency.
DEFINED-CONTRIBUTION PLANS
The majority of employee schemes are defined-contribution plans. That means that the retirement income is dependent on the contributions made to the fund. Usually, contributions are made by both employer and employee, according to the terms of the trust deed governing the fund. Over time, the fund earns interest, which is added to the contributions.
At retirement, the total amount is used to purchase an annuity, from which an income is payable. Employees are encouraged to contribute the maximum allowable amount. First, the contributions are tax-free, and second, the greater the contribution, the greater the benefit one can expect at retirement.
Personal investment has the potential to provide the largest source of income during retirement. There are many financial instruments that can facilitate long-term cash accumulation and capital appreciation. The group of products selected will depend on individual preferences and risk appetites. There are many financial institutions – banks and investment and insurance companies – that provide guidance to individuals who have lump sums or who wish to incrementally save towards retirement.