LOUISE FAIRSAVE: Retirement investing
THERE ARE A RANGE OF investment options that may be chosen in building up a retirement fund adequate for the retirement lifestyle to which we may aspire. Each person may approach their investment choices with a different mix.
From maintaining a savings account with a bank or credit union to a complex portfolio of stocks and bonds, there is a wide range of choices. Some persons may even be disposed to start and operate a business, or say, invest in the real estate market.
If a purposeful choice is made of these investment options, comparison must be made of their rate of return, their riskiness, and the liquidity, the time and the timing of the cash outflows. Then, the financial burden of preparing for retirement may be tremendously lightened by starting as early as possible.
By starting to accumulate a retirement fund early, smaller saving instalments carefully invested can generate a sizeable nest egg drawing on the effect of compounding interest over the long term. It is therefore desirable that younger workers among our relatives, friends and contacts be encouraged and motivated to start preparing for retirement from the first year of their employment, even if it not from the very first pay cheque.
The disappointing recent feature of the Barbados situation is that persons are no longer allowed to save towards their retirement in a tax-deferred way except within a corporate pension plan. Even the National Insurance contributions are currently made after tax. Many most other countries around the world encourage workers to contribute more to their retirement by providing opportunities for tax-deferred savings.
In choosing a portfolio of stock and bond, professional advice about asset allocation is recommended for the investor. For example, the maturity of bonds within the portfolio may be staggered in such a way as to provide ready income annually or for funding a particular event or celebration.
Real estate investing can offer relatively high capital gains. The problem is the illiquidity of such assets, particularly if the market takes a negative turn. In addition, where the asset is land plus a building, building maintenance can give rise to unexpected and significant expenses at just the wrong time. There is also the risk of long-term vacancy of a building, whether a home or office building. A long run of vacancy along with a high maintenance bill can drive this investment into deep financial trouble.
The ultimate risky retirement funding plan is depending on the returns from a business undertaking. The record of the failure rate of new small business is high. Yet, the lack of job opportunities for school/college and university graduates tends to point them into trying to build a business – or just whiling away their time, sometimes quite negatively.
What you will invest toward building your retirement fund will vary when you are in your 20s and 30s compared to when you are in your 50s. As you get older, you will be smart to be more conservative in undertaking risk. By the time you reach your 50s, you will need to start firming up your plans for cash flow from your investments during retirement.
There are pro and cons for converting a lump sum to an annuity. The quality of an annuity is as good as the insurance company providing it. One positive is that the annuity will be for life, so you will not be short of the resulting instalments during your lifetime. However, unless a certain period is chosen, there may be no funds available to your estate if you should die within months of setting up the annuity. In addition, once you have committed to an annuity, you cannot change your mind and ask for a lump sum back.
Finally, in spite of your investment strategy, it is recommended that a cash emergency fund be maintained even into retirement years. As long as you are alive, unanticipated expenses may come up and that is when you can draw on your emergency fund.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.