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Retirement Planning: Its Importance and Tips for Success

What is Retirement Planning?  

Retirement planning according to Journalist Eric Brotman (2019), Forbes contributor, is “the process of determining retirement income goals and the actions and decisions necessary to achieve those goals.  Retirement planning is a life-long process and although persons in their 20s, 30s or even 40s, believe that retirement is a lifetime away and not necessarily something to begin planning for just yet. Truth is, retirement planning should start once we receive our first pay cheque or as early as age 25. This allows us to appreciate, from early, the value of saving and budgeting that is, planning for their personal and financial goals.  Even though the Coronavirus has created a pandemic and persons are adjusting to a “new normal” during this unprecedented time, planning for retirement should remain top priority as discipline.

Financial planning is crucial because it identifies your sources of income and expenses and establishes your retirement budget based on your personal plan. All too often people entering retirement do not place enough emphasis on personal planning to ensure they maximize their opportunities. So take the time now, at an early stage in your planning process to think about the choices you have and about how you would like to spend your time during retirement.

The Importance of Retirement Planning

The reality is that individuals are living longer and as such, it is important that we plan for the years in which you can no longer work. Here are six (6) important points to remember about retirement planning;

  1. Ensures money is available upon retirement for everyday expenses for circumstances that may occur either health wise or wealth wise in the future.
  2. Enables an individual the ability to be able to meet the needs of family members who may be dependent on them even after retirement either for education, medical expenses and or other monthly expenses.
  3. Supports the fulfilment of one’s dreams, wishes and aspirations such as dream vacations, capital investment in business expansion or simply maintaining his or her current lifestyle.
  4. Ensures financial independence in that persons will not need to depend on anyone financially if their retirement planning is spot on.
  5. With change in lifestyle, the average life expectancy has increased and so persons will need more funds for their future.
  6. Most importantly, persons may not have the zeal to work for long and so retirement planning needs to be done at an early stage.

 

Steps to Retirement Planning

  1. Ascertain when you want to retire - Knowing how long you have before retirement will definitely have a big impact on how an individual invests. Whether an individual has 10, 20, or 30 years to plan, an individual will need to think about how to preserve his/her savings and pay monthly bills while outpacing inflation.
  2. Calculate your mortgage, medicine (insurance), utilities, groceries expenses (M.U.G) – M.U.G. is an easy-to-remember term that is meant to represent the various essential monthly expenses people need to cover in retirement.  Being aware of these costs helps an individual create a realistic budget especially during times of uncertainty.
  3. Think about your monthly income -  Knowing about ways to convert savings into actual income during retirement is essential.  Retirees who receive a cheque every month for a set amount from a pension or annuity have shared that they maintain a happier lifestyle in comparison those who did not have a pension or annuity.  Including protected income from an annuity in your portfolio can give you a sense of ease knowing you’ll have money to cover those essential monthly expenses.
  4. Learn about your healthcare options — Retirement age normally exposes individuals to a lot of non-communicable diseases such as stroke, cancer, heart disease just to name a few and as such, it is important for an individual to be aware of the healthcare options available to them either through the public or private system, how much it will cost and what these healthcare options will cover.
  5. Plan for the good - With solid, realistic planning, you can start to think about all the things you want to do and how to get there. Will you actually be able to afford to live on a houseboat or see the Pyramids? Including things you dream about doing in your monthly planning and yearly goals will make the process seem like less of a chore and more of a means to an end: joy and freedom.
  6. Just start - Knowing retirement could last 20, 30, or more years, the best time to start planning is today. Begin thinking about all the ways you can maximize your savings and supplement retirement options with monthly streams of income. Considering an annuity can ensure a more solid monthly footing — and make your retirement years more blissful.

Facts about Pensionable Age

  1. It Could Last Longer Than You Think  -  A 65-year-old woman has a 50% chance of making it to age 85, and a 65-year-old man has a 50% chance of reaching age 82. That’s why younger workers need to plan for two decades or more of income in retirement.
  2. National Insurance Scheme (NIS) will fall short  -  A lot of financial advisors recommend replacing 80% of your usual income once you hit retirement. Most of the time, National Insurance payments alone won’t be nearly enough to hit that target.
  3. Only half of the workforce have a Retirement Plan.
  4. Many are staying longer in the workforce  -  Given that so many persons are behind in their savings, perhaps it’s not surprising that many remain in the workforce well after reaching retirement eligibility.

 

Importance of Budgeting

The key to saving money is simple: spend less than you make. A vital habit to learn when you’re young that will follow you throughout your adulthood is how to live below your means. Your goal should be to live on only 85% of your income. The additional 15% should be put away into some form of savings or investments.  Try and keep track of your spending and income.  Knowing exactly how much money you have coming in and out of your wallet/purse will help you make smarter financial decisions.

 

Illustration of the impact of Retirement Calculation

The scenario at left illustrates two individuals saving $10,000 per month at a rate of return of 10% at different ages.  The accumulated value at the age of retirement reflects that the person who has a longer time at contributing is gaining far more than the person who had a shorter time for investment. This also dramatically impacted the projected monthly returnsPersons who are unable to adequately save from their average income such as teachers are often forced to take a second job to boost retirement income as their retirement payments will barely be able to cover utility bills and food.

Also, upon retirement they might still have mortgage or car payments to contend with.  Compounded with these expenses at these ages, illnesses such as diabetes, hypertension, heart failure, renal failure, cancers and the gamut of conditions that are expensive to treat usually occur.  Also, very often they cannot afford caregivers and if they have children, the children are unable to contribute financially because they too have their own family and educational responsibilities.

 

Financial options available to assist with Retirement Planning for Self-employed or Contract workers

For persons who are self-employed or are contract workers, a personalized pension plan is recommended.  A personalized pension plan allows individuals to accumulate tax free contributions during their working life to provide an income at retirement. 

Benefits to individuals who are enrolled in an approved superannuation fund or approved retirement plan (SMART) include;

  • Contribution is made pre tax  - pay less income tax while building your retirement fund
  • Tax Deferred investment income – savings accumulate at a faster rate
  • Immediate vesting of employer’s contribution
  • Guaranteed Income at retirement
  • Pension savings are protected from creditors
  • You are guaranteed a pension payment for life
  • Saving in a Plan approved and supervised by the FSC

Eligibility & Contribution of approved superannuation fund or approved retirement plan (SMART);

  • Individuals between 18 – 69 years
  • Not active members (currently contributing) of an approved superannuation fund or approved retirement plan
  • Employees wishing to transfer pension benefits from another approved superannuation fund operated by your previous employer.
  • Contributions are deducted from the employee salary before income tax is applied.
  • Minimum  contribution  5% of employee’s salary
  • Maximum contribution  20% of employee’s salary
  • All payments made by the employer are vested immediately  on  behalf of the individual member

Retirement Facts

  • Normal Retirement Age (NRA) between 60-65 years
  • Early retirement  10 years before NRA
  • Late retirement  5 years after NRA
  • Disability – retire immediately
  • On retirement member’s account balance will be used to purchase an annuity – pension is payable for life
  • On retirement, the member may also receive a tax free lump sum of 25% of the account balance

 

How to get back on track

An assessment of current retirement plans may leave an individual feeling either better or worse when done.  This is dependent on how much progress he/she has made towards their retirement goals.   If not quite close to target, revisiting your retirement plan will certainly help in pinpointing the gaps.

It is recommended that in order to get an idea of how much is needed for retirement, it is important for an individual to know his/her current spending and the standard of living he/she wants to maintain. Next, making a note of savings balances and how much is normally saved on a regular basis would set the tone as to what exactly the actual savings pattern should be in order to stay ahead of inflation. 

The reality is, it is never too early to start saving and preparing for financial independence upon retirement.  The earlier an individual starts the more beneficial it will be for them as they will develop good habits while benefitting from the effects of compounding savings.  An individual’s income upon retirement usually comes from three general sources: government pensions, employment-related sources and own personal savings or investments.  It is therefore important especially as we go through this pandemic to take the time to start your planning process.  That is, think about the choices you have and how you would like to spend your retirement.  Without a doubt, the current pandemic has caused many persons to become unsure, scared and confused and question whether or not planning for their retirement is necessary.  The truth is, “this too shall pass” and so putting your life on “hold” is not an option.  Now is this time to reach out to your Insurance and Financial Advisor who is qualified and equipped to point you in the right direction.

 


References

Brotman, E. (2019). Why Retirement Planning Should Start In Your 20s. Retrieved from https://www.forbes.com/sites/ericbrotman/2019/02/12/why-retirement-planning-should-start-in-your-20s/#d414424301cd

HDFCLife website.  7 reasons why retirement planning should be on your priority list.  Retrieved from https://www.hdfclife.com/insurance-knowledge-centre/retirement-planning/7-reasons-for-retirement-planning

Segal, T. (2019). 6 Surprising Facts About Retirement.  Retrieved from https://www.investopedia.com/articles/retirement/110116/6-surprising-facts-about-retirement.asp  

 


Profile of Writer

Marsha Clarke-Bruce is a Regional Sales Manager at NCB Insurance Company.  She has been in the Insurance industry since 2002.  A self-motivated, inspired and inspiring individual who will always work tirelessly, going over and above the call of duty, to serve her clients. She is highly respected and regarded by her peers and managers in the industry who believes that “service is the price that you pay for the space you occupy on this earth”.  She is dependable, trustworthy, reliable, fiducial, authentic, honest, true, conscientious and an extremely competent financial practitioner who is a leader in her class.

Marsha has won many awards and has been very instrumental in crafting strategies and implementing initiatives that has resulted in trained staff, increased sales and improved monitoring and tracking of sales. She was the first person in the history of bancassurance to qualify for the prestigious Million Dollar Round Table (MDRT) in 2004 and one of two persons to become a Life Member of MDRT at NCB Insurance Company.  As a Lion (member of the Lions Club of Mandeville – a charitable organisation), Marsha has held positions such as Chairperson for Youth and Education and Treasurer.  She also serves a Board member of El Instituto de Mandevilla Board of Governors.

Marsha is an alumnus of Bishop Gibson High School, Knox Community College, Bethlehem Moravian College, University of the West Indies and Nova South Eastern University.  She is also an alumnus of Church Teachers College where she obtained a diploma in teaching. In an effort to hone those skills Marsha lectured at Management Institute of National Development (MIND), Mandeville.

As a Sales Manager, Marsha provides her staff with the support and guidance needed for their growth and development while providing her clients with the financial and insurance advice they need. She believes whole heartedly that it’s not what you earn but it’s how much you save.  Also the discipline of saving should come from one’s first pay cheque, that is, they should always pay themself first.

 

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