The ABCs of retirement planning
”Retirement is wonderful if you have two essentials: much to live on and much to live for.” Though this article cannot provide you with the latter, it will share nuggets that at least will give you the essential ingredients for retirement - enough to live on. Being set for life, when you retire from your nine-tofive job, or the daily grind, is easier than you think, if you apply the ABC plan.
THIS ABC plan is simple but requires you to be deliberate; so here is the plan in a nutshell - audit your finances and take action accordingly; put a budget in place to manage and track your expenses; and consistently contribute to your retirement plan, while controlling your expenses. When you have this (financial) underpinning, you will unlock the power to achieve all your financial dreams, as the ABC plan will help you to create financial habits that will allow you to feel energised, empowered and excited about achieving all your financial goals.
Furthermore, retirement planning is best approached as a part of one’s holistic financial planning and is not separate from the achievement of one’s other goals, such as: home ownership; enjoying your dream vacations; buying a car; and wealth accumulation.
Individuals should therefore take a similar approach to establish a solid financial base, starting with an emergency plan of three to six months’ worth of their expenses. What we are seeing as a result of COVID-19 is that more persons are going into retirement earlier than planned, and so they have less set aside. Therefore, for persons who are still employed, they should use the opportunity to maximise their contribution, which can be as much as 20 per cent of their annual gross salary.
During your retirement, it is advisable that you have at least 70 to 80 per cent of your last salary at retirement age. This calculation may seem complex, but with the help of your financial adviser, this projected amount can be calculated so that you can work towards this goal. To achieve this, a multilayered approach should be taken towards retirement planning. The first element of this is, making contributions to the National Insurance Scheme, which is a mandatory payment for all employed and selfemployed individuals in Jamaica. This will need to be bolstered by a retirement plan which can take the form of an individual retirement solution or a superannuation fund, or a group/organisational pension scheme. Meanwhile, the final layer would take the form of supplemental/additional income such as investments or other passive sources of income.
Getting an early start, from your first pay cheque, is the best ingredient in your retirement planning; however, if you have not already done so, the next (best ingredient) is to take action and start planning for your retirement now. Be proactive by having a conversation with your financial representative and moving forward in a step-by-step manner.
Having audited your finances and established your budget, this will afford persons the opportunity to better exercise the next key ingredient – consistently contributing to your retirement plan. It is critical at this point to maintain consistent contributions, more so than making large periodic contributions. In so doing, individuals can benefit from what is defined as the compounding effect, whereby your retirement contributions will increase by earning interest on both the contribution and the interest that is reinvested on an ongoing basis.
CONSISTENCY IS KEY
Although consistency is key, your retirement plan is flexible, whereby you are not penalised for missing a monthly payment; reducing the payment amounts; or taking a break from making these payments because, after all, ‘life happens’. However, reducing or taking a break from making your pension contributions should only be done in dire circumstances, as this impacts your ability to be set for life, after your active working life. Therefore, resist the temptation to forego contributing or starting a pension plan now, due to COVID19. Even though your circumstances may seem overwhelming now, imagine the alternative. If you are struggling now and do not put anything away for your later years, can you imagine what it will be like then? That is the question you have to ask yourself when you think of putting your retirement planning on hold.
Older persons need not be deterred; instead, greater focus should be placed on maximising your pension contribution, in addition to identifying all other sources of income to supplement your pension. With fewer years left towards retirement, you would need to bolster your retirement scheme with other investment solutions, in consultation with your financial adviser, and/or invest in assets such as real estate, which will provide consistent, long-term income in the form of rental income.
You should also monitor your retirement fund by paying attention to your statements. So, as your financial circumstances change, you may need to adjust your approach and contribution to your retirement plan accordingly.