Last week we examined the high cost of retirement and calculated the amount of savings that would be required to replace your income when you choose to stop working. Although cash is tight in today’s economy, if you delay putting aside some of your money for your retirement needs, it will only cause you more financial distress in the future.

Let’s look at some of the options which can help you to achieve your retirement nest egg targets:

Employer-sponsored pension plans

Pension plans, also called superannuation funds, are retirement saving schemes which businesses voluntarily set up for their employees. Larger workplaces usually offer pension plans, whereby both the employer and the worker contribute funds to create a retirement lump sum for the employee. Staff members are required to put aside at least five per cent of their salary into retirement savings, and this figure would be matched by the employer.

Many employees are not aware that they can voluntarily contribute more money every month towards their pension. Recent changes in the Income Tax Act regarding retirement plans now permit persons to save up to 20 per cent of their gross salary in an approved retirement account. This means that if you are currently putting aside five per cent and your employer matches this amount, you are allowed to contribute up to 10 per cent more in your pension plan.

Increasing your monthly contributions can help to boost your nest egg and actually save you money. As pension contributions are tax-deductible, you get the benefit of keeping more of your pre-taxed earnings, as well as reducing the amount of income tax you will have to pay on your salary. Also, the return that your money gains in the pension plan is not subject to withholding tax, so it helps your savings to grow more.

Some persons have expressed uncertainty about the pension plans established at their workplace, fearing that their money might not be invested wisely. The good news is that there is now a legal framework for the pensions industry that will help to protect your money. Under the new regulatory regime, the Financial Services Commission (FSC) is authorised to supervise the private pension industry to ensure the proper management of schemes. Employees also have the right to access information about their superannuation funds and to contact the FSC if they are not satisfied with the operation of the plan.

When leaving their place of employment, many people choose to take a refund of their pension contributions. Taking a pension refund has several disadvantages: you forfeit your employer’s contribution amount; the lump sum may be spent on everyday needs instead of being invested for the long term; and you may lose the ability to earn tax-free returns on the entire refunded amount.

It would be better to request that the value of your savings be transferred to your new employer’s pension plan or to an individual retirement scheme, which will allow you to continue your retirement contributions. If you are vested, which means that you have been saving for the prescribed period to receive a pension payment upon the agreed retirement age, then you could choose to leave your contributions in the existing pension plan to keep growing.

Individual Retirement Schemes

The new pension regulations have given persons who don’t have a workplace-sponsored pension plan the ability to receive the same tax benefits for saving in an approved retirement scheme. There are many financial institutions that are now offering this type of account in Jamaica.

Persons can now receive tax allowances on contributions of up to 20 per cent of their annual gross income per year into an individual retirement account (IRA). This means that if you save in an approved scheme, your contributions can actually help to reduce your income tax payable. Please check with the FSC for the list of financial institutions that offer approved retirement schemes.

You can only contribute to an IRA if you are self-employed, working on contract or not currently participating in a superannuation plan; and you can only save in one IRA at a time. Remember that these contributions are designed to remain in an approved scheme until you have reached the retirement age of 60 or 65. Funds placed in these accounts should be solely for your retirement nest egg, so make sure you have savings to take care of emergency needs and other investment goals.

Investments in other assets

As we noted last week, very often it’s hard to find enough disposable income to adequately fund your retirement savings plan to meet all your future needs. Being practical, you will need to look at other options which can create a consistent income stream when you retire.

Real estate and stocks are assets that can help you to stay ahead of inflation, and can provide income opportunities through rental and dividends. You may also establish a business that can continue to pay you even when you are retired. Take some time to learn more about long-term financial planning, and ensure that you make adequate preparations for your future.

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Cherryl Hanson-Simpson is a financial consultant and money coach, and founder of Financially S.M.A.R.T. Services. Get free financial tools at www.financiallysmartonline.com and practical financial articles at www.financiallysmartadvice.com. Please e-mail comments to advice@financiallysmartonline.com