Never sacrifice your retirement plan for short-term gratification
It’s the beginning of a new year and the opportune time to plan for retirement once you are a working adult or if you are in retirement but just don’t know what to do with your time and resources.
Many people went on retirement at the end of 2023, embarking on a new phase of life’s journey. Last week I advised a retiree on the direction she should now take, which will give her a new lease on life, as she is not accustomed to being at home all day as she was already missing the workplace. Income is not a concern for her, but she desires to be active again and pursue meaningful activities. On the other hand, an adult worker has decided to increase her pension contributions to the maximum of 20 per cent, beginning this month. She realised that retirement is not far down the road, and the time to take action is now. This employee has lost out on years of maximising the contribution matching by her employer. I am, therefore, encouraging employees to maximise their pension contributions early, especially if they are in a superannuation plan. Do not leave money on the table.
Last week, also, I spoke with a 63-year-old new retiree who sought financial counsel to plan for her years in retirement. A diversified retirement strategy is now in place to manage her money in retirement. At least one year’s income is earmarked as emergency funds and the remainder of her pension lump sum is geared at creating additional income for the future by investing in a mix of assets, including stocks. Her monthly pension is adequate to cover her monthly expenses, which allows her to maintain the standard of life that she previously enjoyed.
Retirement planning, I must emphasise, is very important. You will not work forever and it should be everyone’s retirement goal to enjoy the same quality of life they had before retirement or even improve on the quality of life they once had. There is no time like the present. Starting to save early for retirement gives a head start in growing your money. Time and compound interest will catapult your savings. For those who believe it’s too late, a change of mindset is needed. Instead of giving excuses for further delaying retirement planning; it is best to have one compelling reason to begin where you are. Don’t lose or waste time. Your pension is an income replacement for the income earned over years of working.
Keeping your financial plan on track at the beginning of the year sets the stage for the journey ahead. Employees, self-employed and all contributors to a pension plan are being reminded that the annual pension statement is a very important document. Some employees are ignorant of the performance of their pension plans, and this will impair their ability to adequately plan for retirement. An annual pension statement gives a summary of the investment performance of your pension account over the past year and gives an estimate of how much money you will have for retirement based on various assumed rates that are subject to change. The annual pension statement is a financial tool designed to help pension contributors plan for their retirement.
It gives the employee or pension contributor a breakdown of funds in the individual’s pension account, including the interest earned, contributions made during the year, and the accumulated balance at the end of the year. The statements describe the benefits payable on retirement and upon death. The pension contributor has a clear understanding of the total funds to date in their account. Pension contributors may receive pension statements electronically by e-mail or by post.
Pension contributors need to also understand the functions and purpose of a retirement calculator. It is used to calculate how much money is required for retirement. The retirement calculator calculates how much pension you will have in retirement based on your current age and pension contribution. The result will indicate whether or not there will be a shortfall in retirement income at retirement. Because the retirement calculator indicates whether the contributor’s savings for retirement are sufficient, adjustments can be made by the contributor/employee to increase contributions to the pension fund or create other streams of income to supplement their pension income when they retire. Proactive decisions can also be made early to work longer instead of retiring at age 65, depending on current income, debt, and other responsibilities.
Prioritise your financial goals. There are competing financial objectives that must be met such as balancing educational goals, retirement, debt reduction, and leisure and travel during the working years. Never sacrifice your retirement plan for short-term gratification. If more people start retirement planning early, before starting a family and buying a home or accumulating debt, it becomes easier to maintain pension contributions which are invested tax-free and tax-deferred for decades. An experienced and professional financial advisor can provide invaluable support in designing your financial plan.
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 email@example.com