LAST week I had separate conversations with two human resource professionals, which were eye-opening.

One manager reported that some employees were not interested in having financial presentations on money management at the workplace, and requested that financial institutions not be invited. Another HR manager was concerned that most of the staff weren’t saving for the future and the majority of salary deductions made were to financial institutions for car loans and other personal loans.

At the same time, there are employees contributing to pension plans who are not saving enough and have no idea how much money they will need to save to provide adequate retirement income.

Human resource personnel have a critical role to play in ensuring that staff are exposed to financial literacy and the importance of planning for their retirement. Financial advisors are needed to assist employees to plan strategically for retirement. When employees stop working for a pay cheque, what will be there to replace it? And will the retirement income be enough?

Do employees and investors understand the time value of money (TVM)? The term simply means that a dollar today is worth more than the same dollar in the future, but if that dollar is invested at compound interest over a long time it will have a greater value in the future. Many people do not understand the power of compound interest and time. Also, many are not aware of the opportunity cost of spending now and delaying planning for the future. The choice to spend most of one’s income today on things that are not income-generating is the opportunity cost of saving and investing to provide peace of mind in the future. Every financial decision we make has a cost in terms of the opportunity that is given up. Some employees are missing out on a brighter future, which is the cost of instant self-gratification — it’s a mindset of living now and paying dearly later.

Spending 40 years working and saving even 15 per cent of your income monthly can provide a sizeable nest egg for retirement. It requires commitment, discipline and persistence. Long-term goals such as children’s college education and retirement can be accomplished with ease as compound interest and time multiply the growth of the funds invested, which can lead to wealth creation.

In saving for retirement it is recommended to save at least a year’s salary by age 30. This is a good guide for the younger generation who would be on to a great start on their financial journey. In the USA, investment firm Fidelity Investments recommends that at least 10 times one’s pre-retirement income should be accumulated for retirement at age 67. This amount is projected to replace 45 per cent of the pre-retirement income. The social security benefit is expected to offset any shortfall and provide the retiree with the same standard of living they once enjoyed during their working years. In the Jamaican context, saving 10 times one’s pre-retirement income may prove insufficient to maintain the standard of living that was enjoyed before retirement. Additionally, social security (NIS) benefits are not sufficient to make up for any shortfall in pension income.

Having a pension plan and supplementing your pension funds by investing in other long-term investments — such as stocks, real estate, unit trusts, or mutual funds — can provide adequate income in retirement. For those who started saving for retirement late, please note that is“ better to be late than sorry”. Part-time jobs, starting your own business, and increasing pension and investment contributions, especially as you near the retirement age, will augur well in building sufficient funds for lifetime retirement income.

For private sector workers in Jamaica, I recommend a maximum 20 per cent contribution to pension funds, including the employers’ contributions. Don’t forget to increase your pension contributions whenever you receive a salary increase. The sacrifice is worth it. The services of a qualified and professional financial advisor are necessary in formulating how much funds will be needed to maintain a quality life in retirement based on your unique circumstances and retirement goals.

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