The Retirement PlaybookBy: Trecia Gay Clarke, Head of Pensions Administration Posted:
People sometimes find it difficult to conceptualize retirement simply because they usually hear about retirement and pension for the first time while in their early 20s. At that age, they have about 40-45 years before retirement and so it is a distant reality. Who is really thinking about retirement in their 20s? Whenever we meet with groups or individuals and we ask about saving for retirement, one of the most common responses is “We can worry about that when the time comes, we are focused on our immediate needs”.
This is easily the most detrimental strategy that one can have but it underscores the problem which persists. It is not until persons are mid-way or close to retirement that they start to worry, as the strategies and plans that should have been in place from the earlier years were simply not executed effectively if any at all. The reality is, nobody wants to retire to a lifestyle that is not equal to the lifestyle maintained during their working life. The statistics show that persons are living longer with a mortality rate of 76 years. This means that an individual will spend about 15 to 20 years on average in retirement. Additionally, coverage in private pension arrangements in Jamaica is just about 10.36% of the employed labour force. This implies that there is a lack of education about pension and not much focus on long-term planning.
A comprehensive pension and long-term investment strategy is therefore needed, with education surrounding pension benefits at the core. The following are strategies that should be employed to ensure you live a comfortable lifestyle in your retirement years.
- Apply the 3-pillar approach to retirement planning
- The National Insurance Scheme (NIS) should be at the core of one’s retirement planning portfolio. Albeit a small amount which is deducted from one’s salary every month. The benefits of the NIS are pretty good when considered objectively and so we should not underrate its importance.
- The next layer is your Personal Savings – this is something that everyone should be doing:
– whether it is for a rainy day
– you have the desire to accumulate wealth
– you are investment savvy.
You can never save too much.
- At the very top of the retirement planning pyramid is the Private Pension Arrangements, that is an approved superannuation fund (ASF) or an approved retirement scheme (ARS). These vehicles are efficient ways to save towards retirement and the benefits acquired through an ARS and ASF cannot be achieved through other types of investment. These benefits include tax deferred contributions, tax-exempt investment returns, tax-free lump-sum on retirement and matching employer contributions in the case of a defined contribution plan.
- Join a private pensions arrangement from your first job
The earlier you start, the easier it will be to save for retirement. The impact of investing over the long term free of income tax and further compounded by investment income, which is also tax free, is incredible.
- Take matters into your own hand
If your employer does not have an ASF in place or if you are employed contractually, you can enrol in an ARS. The PROVEN Rock Approved Retirement Scheme is here for you!
- Contribute the maximum amount
Do not settle for contributing only the compulsory 5%. Your objective should be to get to the maximum amount allowed by law throughout your career. The maximum contribution that can be made by or on behalf of any member to a private pension arrangement is 20% of that member’s taxable income. As a member, you are allowed to contribute the difference between 20% and what the Employer contributes on your behalf. That is, if the employer contributes 5%, you can contribute up to 15%.
- Do not take a refund of your contributions
It is unlikely that you will spend your entire career with one company. There may be life changing opportunities which will result in you changing jobs over a very long career. Whenever you are leaving a company, do not take a refund of your contributions (basic or voluntary); a refund of your basic contributions sometimes results in a forfeiture of the employers’ contribution made on your behalf. Allow your pension contribution to remain in the ARS or the ASF or transfer it to another ARS or ASF. This ensures that you have continuity and it will also qualify you for a maximum pension of 75% of your annual income at retirement.
- Plan strategically for the long term
If you are a member of an ARS where you have the option of choosing your investment allocation amongst various asset classes, it would be best to allocate some of the contributions towards an asset class such as equities (once you have time on your hands) which usually outperform other asset classes over the long term. However, this should be done in conjunction with specific risk tolerance and should be carefully considered based on your age.
Planning for retirement is not usually easy but it is achievable. Visualize what you want your retirement to look like and take active steps to achieve it. As with everything in life that yields a great reward, a good retirement plan requires sacrifice and consistency – it requires investing something today (by saving) to ensure that you will benefit and be comfortable at a later date.