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The risk to your retirement
Last week I focused on a looming pension crisis and the fact that this is a global trend to which T&T is not immune. In the face of possible pension plan deficits, the unanswered question relates to who will make up the short fall. That then poses another question: at what age do you plan to retire?
The truth is that some may actually not have a choice to make.
For some that lack of choice is due to the fact that they may be faced with a mandatory retirement age. That age usually ranges from age 60 to 65. There are others who may have greater flexibility but may eventually be forced into retirement through ill health. This is particularly applicable to self-employed people and those involved in manual labour type of activities.
So what about after you retire?
With advances in medical care it is quite possible and, in fact, very probable for a person currently aged 30 to 40 years old to live well into their 70s, 80s and even 90s. That could easily mean 15, 20 even 30 years of post retirement life. So how are you going to fund those retirement years and where are those funds going to come from?
A study conducted by the American Benefit Research Institute suggests that the average American would have to work into their 70s and even 80s in order to afford retirement. This is because, first of all, they have not set aside sufficient funds for retirement and, secondly, the costs for some of the basics of life, that is food, transport and medical care have been increasing rapidly and will continue to do so and in the process outpace the rate at which their retirement funds are growing.
The experience in T&T is likely to be the same.
For one, as suggested last week, it is impractical to rely on the State to support your retirement lifestyle and there are a number of issues that the average 30 to 45 year old is not taking into consideration. Consider that people are tending to get married later in life and have less children that the earlier generation.
Also, property prices have skyrocketed over the past 20 years.
Further, inflation is such that your purchasing power has fallen by around 60 per cent from 2000 to now.
The implication is that people are taking on larger debts (mortgages), later in life and inflation is also reducing the level of disposable income. Further, less children means that as parents there are fewer potential candidates to lend financial or other types of support in your later years.
I have stated this many times before but it bears repeating.
You really have three options open to you when it comes to planning for retirement: either save more, invest more aggressively or be prepared to work longer.
If you think about it, factors such as the job market, the level of inflation and your current level of debt will create challenges to your ability to save more. Your ability to work longer is also a function of your employability at that age and your health. The latter is something that can present unforeseen challenges as the cost of treating with medical challenges can not only prevent you from working but also quickly erode the savings that you have accumulated.
If you accept the challenges associated with saving more and working well into what would have previously been your retirement years, then appreciate that the next option is to take a careful look at how you invest.
Over the past few years we have seen investing take on two broad approaches.
1. Pre-2009 there was the chase for high returns, which carried the perception of no risk that have resulted in almost total impairment of the invested funds.
2. Post-2009 the situation has morphed into an investor that “does not like the two per cent return but does not want to take any additional risk”.
The overall conclusion is that most people simply do not know how to invest and approach the subject from extremes based on greed and fear. The end result is usually failure to achieve their investment goals. That essentially is the greatest risk to your retirement.
When we fail to understand this risk we end up making poor choices. Most will not accept their inability to take a sound, structured approach to the issue. They will also feel they can do it themselves and avoid seeking out a competent and experienced investment adviser. When it does not work out (as is most likely to be the case) they will instead conclude that “this is not for me”. By doing so you are implicitly making the decision that you will be working well past age 60 or that you will be faced with a retirement lifestyle that is significantly below what you currently enjoy.
Have you ever wondered why so many people aged 50 and above get caught in financial schemes? The answer is that at this age many are faced with the panicked realisation that time has run out and so opt for the most attractive “get rich scheme” on offer.
There is a fundamental point to appreciate. At every moment, in every stage there is an investment strategy that can assist you in achieving your financial objectives. Consider the current scenario where most income funds are quoting rates just above one per cent. Rates have been low for the past eight years even though they may now be trending upward. If you simply remain fearful and stay in near cash investments that will impact your ability achieve the sums you need to retire comfortably.
It could very well be that accepting a low rate of return in order to feel “safe” is a very high risk strategy in terms of achieving your retirement goals. It is important to put your investments and the returns on those investments into the context of what you are seeking to achieve and adjust your strategy in order to ensure that you stay on track.
A recommended approach would be to seek out avenues that can provide you with the exposure to the growth investments you need so that you are still positioned to achieve the requisite investment returns while at the same time managing the risks of investing overall.
If you seek such an approach, considered to be the middle ground, you will, provided you are properly advised, find a strategy that can work.
At the end of the day it is not a case of all or nothing, high risk or no risk, but rather seeking out ways that you can achieve your investment objectives in a manner that effectively manages the risk that you face. Recognise that over time strategies change and what works today may not be as good or even relevant in a different investing environment.
It all comes back to you taking the time and making the effort to recognise what is required and then stay the course the achieve your stated investment objective. The alternative is working long past age 60.
Ian Narine is an investment adviser registered with the SEC and can be contacted at [email protected]