Hutchinson
If the idea of Retirement has you worried, repeat after me: Retirement is not a four letter word.
Not convinced? Doubtless you are not alone. Although retirement is for many of us inevitable, it gives us chills not only because of the psychological impact but because often we are not financially ready. And, with the changing regulatory environment and the challenging economic times, we really do not believe that the plans we have put in place will hold up in the long term.
But the truth is, it's not all bad news.
True, the picture appears very grim. In the United States, for example, The Economist reported in December that there was a US$2 trillion drop in the value of pension fund assets in the 18 months up to October 2008.
Total assets in Organisation of Economic Cooperation and Development pension funds fell by approximately 22 per cent in real terms.
increase in redundancies
Here in Jamaica, redundancies have increased and a recent Sunday Business article pointed to 9,331 persons being made redundant in the last 12 months.
The local currency has lost significant value against its American counterpart, and between December 2007 and December 2008 the JSE Market Index declined by 35 per cent. Added to which, interest rates have recently spiked.
Yes, we still say it's not all bad news. There are opportunities to build up your retirement funds.
FOUR WAYS TO BUILD
Generally, there are four ways to get it done:
Employer-sponsored Pension Funds: These are retirement savings plans which are voluntarily established by employers for their staff.
Usually, the employer and the staff member both contribute to the plan, which generally pays a benefit to the employee or his beneficiary upon a specified age, at death, or upon becoming disabled. This type of plan offers a tax-deductible and tax-deferred benefit.
Individual Retirement Scheme: This is a type of retirement savings plan that is useful for the self employed or employed persons whose employers do not offer an employer-sponsored pension fund.
Being self-employed, therefore, is not a reason to not accumulate tax-deductible and tax-deferred retirement savings.
Retirement schemes pay a benefit upon reaching a certain age, at death or upon disability.
State Retirement Plan: Many Jamaicans forget that the National Insurance Scheme (NIS) exists to assist with retirement.
True, we cry that the amounts are not significant, but what is the point of making tax-deductible and tax-deferred contributions and then not claiming it back when we're eligible?
NIS pays many benefits, including those upon attaining retirement age, at death, or if you become disabled.
Personal Savings and Invest-ments: Most Jamaicans believe that this category is the linchpin of their retirement savings plan.
Investments often take the form of life insurance policies, savings accounts and investment instruments, for example, shares and repurchase agreements.
These savings and investments are usually purchased with after-tax dollars.
HOW TO SAVE
Now that we understand the general ways we can save for retirement, we can start to look at the best ways to do so in this challenging environment.
Remember, as always, that in the midst of chaos there are always lucrative opportunities.
You will need to calculate how much funds you need to accumulate for your retirement.
A good rule of thumb is always to have 10 times your annual income.
To get the most out of your company pension fund or individual retirement scheme it is always best if you contribute the maximum allowed.
With the recent changes to the Income Tax Act for retirement schemes, this is currently 20 per cent of your gross basic salary.
Contribute the maximum
Note, this is reduced by any contribution made by your employer. Contribute the maximum allowed because there is a tax-deductible and tax-deferred benefit which you will not get with any other type of retirement savings plan.
The changes in the local legislation have been designed to protect the members' benefits of company pension fund and individual retirement schemes members.
They allow for members to raise issues with the Financial Services Commission if they believe their rights have been jeopardised; be a part of the decision-making mechanism of the pension funds or schemes, which includes how funds are invested; and dissemination of information concerning the pension fund and retirement scheme to all members. Therefore, if you are serious about planning for your retirement, ensure you know what your plan provides. What is the age at which you can retire? Is it 60 or 65? Do you have to go at that age, or can you go later or earlier than this? How much earlier?
With respect to your personal investments, remember that although investors have a pack-like mentality, the truly savvy individual will sniff out the true revenue earners.
With all the current confusion some assets may now have fallen in value and there may be some bargains to be had.
risk profile
Speak to your investment broker to discover what these currently are and what asset mix is appropriate for your risk profile.
Planning for retirement is not an impossible undertaking, just challenging. But in the midst of challenge there are signposts to direct the way.
Karen Hutchinson works with Milestones and Lifestyle Planning Services, a Jamaican-based retirement consultancy working in collaboration with Today's Money Limited.