Being financially prepared for retirement
One of the most important life events that all individuals are faced with is retirement. Planning for retirement is an essential part of future financial security. The transition from employment to comfortable retirement is an extremely extensive process that requires precise, persistent and meticulous planning. The process of planning a successful retirement is complex, time-consuming, in other words nothing short of daunting. Luckily, there are many organisations locally that provide retirement products that will assist individuals in achieving a comfortable retirement.
WHY INVEST IN A RETIREMENT FUND
With the Christmas season right around the corner, there is no better time to start thinking about investing in a retirement fund. Most companies will be coming to their financial year end and bonuses and profit sharing schemes will be paid. This is an ideal time to begin saving for retirement while protecting your bonus payments from taxes. Investors can experience benefits from tax advantages both on an individual and corporate level. Individuals can receive a tax break on income invested in retirement funds or annuities up to a maximum of $30,000 per annum. This translates to an annual savings of $7,500 on taxes paid. Imagine being able to reduce your taxes AND protect your retirement at the same time.
Investing in a retirement fund also provides enhanced benefits in the form of higher returns, as assets can be invested in equities or fixed income, both local and foreign depending on the economic climate. As can be seen in Chart 1, retirement fund performance for 2011 was well above the rate that investors receive on a savings (0.5 per cent) or money market account (1.5 per cent). In a climate of high inflation and low rates of returns on fixed instruments, it is crucial to secure higher returns as much as possible so as to ensure a comfortable retirement.
CHOOSING A RETIREMENT FUND
With a number of investment products available, investors should select an option that is in alignment with their objectives. Some of the factors to take into consideration when choosing a retirement fund include:
Average returns on investment — this is a performance measure used to appraise the efficiency of an investment or compare the efficiency of alternative investments. Favourable investments are those that are positive and have a higher return than other options. The average five-year returns on Retirement Funds domiciled locally range from 3-6 per cent. In 2011 the average return of local funds was 5.8 per cent.
The chart below shows projected retirement savings with a 5 per cent return over a period of 30 years with a 3 per cent increase in contribution throughout the period. From this we can see how important it is to have a plan generating sufficiently high returns in the long run.
Optimal weighting — assets can be weighted in equities or fixed income both local and foreign. In the local arena there are firms that offer limited options of only being able to invest locally.
The composition of your portfolio depends on your current situation and objectives. Capital appreciation and current income are the fundamental principles in fashioning your portfolio. Younger investors have the benefit of having a longer time horizon and can therefore afford to be riskier in their asset selection. On the other hand those closer to retirement are more concerned with preserving capital and generating income and prefer to include safer assets such as bonds so that their funds can make it through their retirement years.
Those with a low tolerance for risk need to choose a pension plan that invests conservatively. Those with a much higher tolerance for risk may choose plans that invest a higher weighting of the portfolio in the equity market.
A typical asset allocation of a retirement fund is balanced. A balanced fund generally invests 50 per cent of the assets in fixed income and the other 50 per cent in equities. This kind of fund is ideal in keeping with an objective of generating a return for the medium to long term while preserving capital.
"Unlike pension funds which have administrative, investment and individual service fees attached, most retirement funds have no up-front costs. Essentially, your entire investment begins working for you from inception. However, a small administrative fee is charged on the overall plan. The administrative fees charged on a plan are dependent on the particulars and scope of the plan. For example in a group plan the administrative fee charged will be dependent on such things as the amount of people in the plan, the benefits that they want to receive and how much flexibility they want.
"One must also assess the degree of flexibility in terms of transferability, suspension or reduction of contributions, withdrawal and early retirement of the fund. Plans that offer a greater degree of flexibility will tend to charge higher management fees and commissions. Most plans locally require a minimum monthly contribution of a $100-$1000 and provide specific provisions that allow individuals to adjust their contributions based on their financial situations.
In order for the capital invested to be guaranteed, investors must remain in the fund for a stipulated number of years. The norm in the market is five years however some plans require as little as three years. The general trend in the market is a maturity period between the ages of 50-70 years but some plans provide 100 per cent availability in cases of emergency.
Retirement planning is an on-going, lifelong process that takes a lot of commitment in order to receive the final payoff. It is of utmost importance to understand how the plan works and the benefits that will be received. A good retirement fund has the potential for superior returns, flexibility in contribution levels, and a high aggregate plan value at maturity. Before one invests in a retirement fund, they should analyse and assess the investment and the firm that is offering the product. Bourse Securities Limited is a local retirement provider than can assist you in getting ready. As at the end of September 2012, BOURSE's Individual Retirement Fund (IRF) produced year to date (YTD) returns of 7.81 per cent, superseding the 2011 market average. The performance of the Group Retirement Fund (GRF) was even more stellar as it produced a return YTD of 9.14 per cent.