Avoid last-minute retirement planning
PLANNING for retirement maybe the last thing on your mind the first day of your professional life, but it should actually be at the foremost of your mind as you greet your new boss, say financial experts.
In the same way that some people dread making a will, for fear of the inevitable, retirement planning appears to also conjure horror of the impending downhill trod into old age, an aspect of life that the young and adventurous would prefer not to think about.
But the earlier you begin to save, the more you will manage to accumulate to put yourself in a comfortable financial position after your working life is over, sais First Heritage Co-operative Union's Richard Dunn.
"One should plan for retirement with joy," he told Sunday Finance.
For the business development officer, individuals should also try to contribute the maximum amount allowed in pension schemes since "there can never be too much savings for retirement".
He explained that defined benefit — superannuation or group pension — plans which are typically offered by companies, specify the amount that will be paid to an employee upon retirement.
Workers are required to contribute a minimum of five per cent to this fund, which is then matched by the employer's five per cent contribution on the employee's behalf.
"The difficulty comes in when people who can afford to contribute more than the specified five per cent, do not do this thinking that they will have enough put aside for retirement," he reasoned.
The maximum five per cent contribution to the National Insurance Scheme (NIS), which includes a one per cent National Health Fund (NHF) contribution, seems to also be perceived by some as adequate savings for retirement.
However, the NIS pension "by itself cannot be depended on to afford an individual the quality of life they had during their working years," Denzil Thorpe, director of social security with the Ministry of Labour and Social Security, said.
"The contribution rate is very small, which puts it at the bottom rung when it comes to retirement savings," he said, adding that there is no requirement for those who can pay more to do so.
Thorpe explained that social benefit funds such as the NIS are used to provide benefits for varying social needs and therefore have to be spread to benefit the entire segment of the population who need it.
As such, benefits such as funeral grants and maternity allowance for domestic workers must also be taken from the fund.
"So individuals are encouraged to seek additional retirement packages that will afford them a better quality of life," he said.
Approximately 450,000 persons currently contribute to the NIS, with the scheme paying benefits to over 100,000 of which 75 per cent receive retirement benefits.
To compound the problem, inflation and economic shifts such as the National Debt Exchange (NDX) present further challenges for retirement savings.
The NDX aims to lower the annual finance costs of Government by $17 billion, by shaving an average of two percentage points off interest rates on $860 billion of its domestic debt.
Janice Mills, manager of Jamaica National Building Society's (JNBS) New Kingston branch, noted that most pension funds are invested in Government of Jamaica (GOJ) bonds.
"As interest rates on these bonds fall, so will the return on pension funds invested," Mills said.
Persons retiring in the immediate future or in the long term will therefore receive smaller pensions she advised.
"Not only because the rate of interest has been reduced, but because their pensions will be reduced by rising inflation due to increased taxes," she said.
The JNBS executive advised that pensioners will have less money to buy food, pay utilities and pay for medical services among other expenses.
"The time value of money therefore necessitates that the more prepared you are the better," Dunn reasoned.
Operating on the principle that a portion of one's earnings should be used as a safeguard against uncertainties, insurance policies may present a source of monthly income for retirement.
"Depending on the type selected, cash or unit value of a policy upon maturity could be used to purchase an annuity," Sagicor's Randolph McLean explained.
"The income from some annuities are paid out whether the insured is alive or not," he explained adding that these policies could therefore be a source of income for a surviving spouse.
For Dunn, Jamaicans tend not to think long term, which he reasoned, can be problematic for retirement planning.
He explained that some persons opt to pull their pension funds from their company pension schemes when they change jobs and often end up "eating the money instead of investing it".
The business development officer urged a disciplined approached to pension planning and suggested that the funds be left in the pool at the former company, transferred to the new company's pension funds or to an individual retirement scheme.
He further suggested that individuals in company pension schemes consider rolling their benefits into their salary packages when approaching retirement since payments are calculated using an average of the last three year's gross salary.
"Some people have a benefits package that is bigger than their actual salary," he said. "So if you roll your benefits into your salary, your pension payout will be calculated at a higher rate giving you more to live off," he explained.
"You just can't wait until you are near retirement to start preparing, it takes a lot of planning and discipline to ensure a decent life after you have stopped working," Dunn cautioned.