BY GRACE G MCLEAN

IT’S not easy living on a fixed retirement income without careful financial planning.

There are many retirees who rely on fixed incomes in retirement. In some cases, they receive income from their monthly pension and NIS pension benefits while for others their only source of income is the NIS pension benefit or the social pension programme.

Without other sources of income, relying on a fixed income during retirement can prove quite stressful. It was reported in the press recently the plight of several retirees who encountered the “silent thief”, otherwise known as the thief in the night or inflation. The retirees robbed are now in their 80s and 90s. They were robbed of the purchasing power of their money. It was alarming that, after many years in retirement, they suddenly discovered that their monthly pension could no longer cover the cost of their groceries and utilities. One of the retirees reported that in just one month the value of his money had been eroded as his monthly pension could only cover the utility bills. The retiree lamented that the increase in utility bills has left seniors bereft of funds to pay for groceries.

I have often addressed the matter of the silent thief– inflation – which is the biggest threat to your income, especially for fixed income earners. Sadly, many investors, savers, employees, and retirees fail to apply the inflation factor in their retirement plans. The erosion of purchasing power is gradual, and because of compounding it becomes exponential with time, therefore it will seem that suddenly your money is not able to purchase what it could five, or 10 years, or even a month before. This is because inflation compounds in the same manner that interest on your investment compounds.

If your investment or pension fund grows by eight per cent in one year but inflation is at six per cent, then in real terms your fund grew by only two per cent for the year. In other words, the real growth is two per cent. This is one reason employees, pensioners, and investors should keep investing to supplement their pension — even in retirement. Your money should never retire, because inflation doesn’t go on retirement.The stock market is not your biggest risk, it is a solution to beating inflation in the future.

Having a diversified portfolio asset mix is important to an investor’s or retiree’s success. The mix of assets may include stocks, bonds, and real estate. Bonds can offset the risk from stocks but stocks have consistently delivered against inflation — from one decade to the next — more than any other asset class. Don’t fear the stock market; your investment’s biggest threat is inflation. Having the right mix of assets in your portfolio that is relevant to your age, risk tolerance and goals is key to increasing the purchasing power of your money. A competent financial advisor can assist in rebalancing a client’s portfolio, based on the client’s risk and reward profile.

There are real tangible benefits in having a pension plan. The importance of starting a pension plan early during the working years remains a key factor in having a suitable nest egg for your retirement needs. There is an asset called time. It’s value should never be discounted. Time may not be stated among your portfolio of assets, but without time your money cannot compound. The longer your money is put to work the greater the reward in the long-term. Because your pension is locked away, it is working, undisturbed even when you have stopped working or have stopped contributing to the fund. There may be temporary losses from time to time, based on market conditions, but you will have far more years of gains in comparison to times of loss. Compound interest works perfectly with pension funds. A pension fund helps with maintaining the standard of living in retirement that was enjoyed during the working years.

Employees who are vested in a group pension plan can benefit from financial security in retirement. I am therefore encouraging employees in the private sector or self-employed individuals to increase their pension contribution to the maximum 20 per cent ceiling, as soon as possible. If you started out with small amounts, ensure to gradually increase the contribution over time. A tremendous benefit to contributing to a pension plan is the tax benefit gained. Don’t rob yourself of having your money invested tax-free and tax-deferred.

One of my clients asked whether her mother should contribute to a pension plan or invest her money instead. I advised that her mother should continue to contribute to her pension plan and invest to supplement it. Especially if you have started saving for retirement late, investment should not be optional, but compulsory. You can’t get back time lost to compounding, but you can maximise the time you have now. The latest report from the Bank of Jamaica Monetary Policy Committee revealed that core inflation (excluding food and fuel prices) stood at 5.2 per cent in July 2023. However, further research showed that food inflation stood at 11.26 per cent for the same period. It’s therefore not difficult to understand the despair expressed by the above-mentioned pensioners who suddenly realised that their monthly pension was no longer able to buy their usual supply of groceries. I am advising pensioners to cut back on optional expenses and keep building their emergency fund (safety net). Small steps lead to great results. Avail yourselves of all social benefits. Saving and investing should never stop.

Grace G McLean is a financial advisor and retirement specialist at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com