The subject of inadequate retirement income was raised during an investment portfolio review that I had with a client. She is a pensioner who is a successful and astute long-term investor. Based on her understanding, a pension plan only replaces 40 per cent of one’s pre-retirement income. But this is not a fact. Ironically, some Jamaican pensioners are receiving 40 per cent or less of their previous income and have found that their pension income has not kept pace with inflation.

Financial experts recommend that your pension should replace 75 per cent to 80 per cent of your pre-retirement income. This rate is recommended because you are expected to have fewer expenses in retirement. However, even an 80 per cent income replacement may not be enough to provide a quality way of life in retirement.

The reality is, everyone has different needs, goals, and financial responsibilities in retirement.

My client expressed the view that pension plans are introduced to employees without any realistic projections of how much they will receive as retirement income and how much they should be saving to retire comfortably. There is a common mistake that’s made by both employees, employers, and financial institutions. Some employees are only interested in making the minimum contributions and are unaware that, at an older age, they will need to be saving or investing far more, as there is less time to invest funds as the retirement age draws near.

Retirement planning is far more than having a pension plan. My client is concerned that many people believe that a pension is all they need for retirement, because they were not taught the importance of having a retirement fund, which includes other streams of income.

My client has been investing for many years and thereby created a diversified retirement fund consisting of stocks, a pension plan, bonds, and real estate. She understands the necessity of the services of a financial advisor, especially at this stage of her life, where longevity and financial risks are heightened.

Though her investments have grown tremendously, she now seeks financial advice concerning asset preservation, capital appreciation, and succession planning in an unstable global economic environment.

Financial insecurity affects people differently. For the retirees with little or no pension income, financial insecurity means not enough income to meet their needs and facing the increasing risk of outliving their money. On the other hand, there are the retirees who have multiple streams of income and diversified assets, who, on paper, seem to be successful investors who should be living quite comfortably in retirement. But they have become anxious about the future based on the present economic climate. Financial insecurity impacts the mental health of retirees on both ends of the financial spectrum.

A World Bank report identified four income sources for seniors as follows:

1) continued work

2) family support

3) income from assets accumulated over time (eg, rental income, and financial assets)

4) benefits received from government programmes

The report revealed that, globally, many seniors continue to work beyond age 65, particularly those who work in the informal sector and who lack adequate social benefits. In the Caribbean, at least one-third of the men continue to work after age 65, and in Africa half of the men and one-third of women continue working after age 65.

Having pension income and owning a home in retirement are important for the peace of mind of seniors. According to the World Bank report, the Singapore pension fund, the Central Provident Fund scheme, has resulted in many pensioners becoming “asset-rich and cash-poor” because portions of the pension savings provide housing for pension contributors.

In most Organization for Economic Co-operation & Development (OECD) countries, pensions are reported as the “single largest source of income for people 65 years and older”. For developing countries, most seniors either do not receive a pension or receive only a non-contributory social pension, which is not enough to meet basic needs. This results in more seniors working at older ages for as long as it is possible.

High-income countries have high pension coverage, but that’s not the case for the low- and middle-income countries (LMICs). Pension coverage is low in LMICs. Approximately 20 per cent of Jamaica’s working population contributes to a pension plan. In the LMIC countries, most workers are in the informal sector, which consists of self-employed individuals and small businesses who do not pay payroll taxes and do not provide retirement or employee benefits.

Contributory pensions remain low in numerous developing countries. The World Bank reported that with the low pension coverage in the LMICs, coupled with an aging population, older adults are most vulnerable to poverty and a low quality of life. According to the World Bank report, developing countries run the risk of growing old “before they grow rich”.

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.