Oran Hall | Plan for greater financial security in retirement

Retirement, being the final phase of your life, should be its crowning period when you enjoy your best life, barring debilitating health issues.

How well you succeed in realising this period of fulfilment depends on the long-term plans you put in place and how well they are executed using the wide range of available strategies.

The following are important in helping you to succeed in accumulating the resources for a happy retirement: start early, make the maximum allowable contribution to a formal pension arrangement, diversify retirement income sources, make the best of tax benefits, choose the most suitable retirement products, adjust your lifestyle and reduce your debts and expenses before you retire.

Begin to save for retirement as soon as you start earning. Starting early lets interest compound for a long time and unleashes the power of long-term growth for investment instruments that appreciate in value. If you have missed the opportunity to start early, increase the contributions to your retirement fund as much as you can to boost its growth.

Some employers sponsor pension plans, so it is easy for employees to start as soon as they enter the work force. In the case of a defined benefit plan, the employee makes a mandatory contribution, and the employer contributes at the rate required to pay the defined pension benefit.

The employee may also make a voluntary contribution to provide a top-up to the pension benefit at retirement.

If it is a defined contribution plan, both the employer and employee make a mandatory contribution, but the employee may make a voluntary contribution to take the contribution rate to 20% of pensionable income. If there is not an employer-sponsored pension arrangement, new employees can enrol in an approved retirement scheme.

The self-employed, contract workers and employees whose employers do not sponsor pension plans can save for retirement through the approved retirement scheme. Contributors can contribute up to 20 per cent of their income tax-free and derive the same benefits as members of employer-sponsored pension plans.

In the case of those who are employed, their employers may also make contributions for them but the combined contributions must not exceed 20 per cent of the employee’s pay.

The tax-deductibility of pension contributions makes the contributor pay less income tax and increases the amount of money available for investment in the pension fund. Beyond that, the income earned on the contributions in the pension fund is not taxed, thus giving a significant boost to the growth of pension savings, and although pensions are taxable, recent tax changes have raised the level at which pensions are subject to tax.

To build a strong foundation for retirement, make the maximum pension contribution that the law allows.

Tax-free benefits are also available on other financial instruments, long term savings accounts, for example. Account holders can save a maximum of one million dollars each year for five years, but cannot withdraw more than 75 per cent of the interest earned each year to qualify for the tax benefit. Even with relatively low rates, interest can accumulate well by rolling over the funds as soon as they mature.

Additionally, there being no capital gains tax in Jamaica, gains on equities and unit trust and mutual trust funds that are primarily growth funds are not taxable.

Have as many sources of retirement income as possible. Do not rely on just a pension from the National Insurance Scheme, commonly known as the NIS, and your pension plan. Create an investment portfolio of stocks, bonds, money market securities, real estate, unit trusts, for example, to provide a steady stream of income, and to preserve and grow capital to secure your future. If you are in good health in your retirement years, consider part-time work.

Building up a good reservoir of funds is just one part of the story; blocking leakages before and during retirement is the other. This can be achieved by adjusting your lifestyle and reducing expenses to increase savings. For example, acquiring a smaller home or re-locating should be helpful in reducing living expenses.

Paying off high-interest debt before retiring is another way to reduce expenses in retirement, and structuring your bond portfolio to have bonds maturing at different times can obviate the need to sell bonds in unfavourable conditions to provide liquid funds.

People are living longer, so plan to live for 15 years or more after retiring. Expect prices to increase as time passes, and anticipate increases in health care expenses. It will likely cost much more to live in the later years, so it is important to have the means to meet these expenses.

The rate at which you withdraw funds during retirement is therefore important. The ultimate goal is for your income to outlive you.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com