Of every 100 Ghanaians that retire at 60 years, only two of them live comfortable lives. Twenty-three of them will have to work again after retirement to be able to make a living, a recent study by investment advisors in Ghana has revealed.
The remaining 75 normally rely on charity, pension payments and gratuities from loved ones, friends and family members to be able to survive. Should those handouts cease, these people will run into bankruptcy, the study indicated.
As revealing as this may be, the finding is a rhetorical inquisition of all prospective retirees and those currently below 60 years whether they will be among the two per cent, 23 per cent or 75 per cent cohort. Stated differently, the big question is: Will you retire a dependent or an independent?
The stark reality is that putting something aside for old age has become an unavoidable necessity these days. As life expectancy rises, many of us can expect 45 years in employment followed by 30 years of retirement, possibly living on until we’re in our nineties.
So, how can you make sure you’re not left out of pocket for three whole decades? Simple answer: plan effectively. How, exactly, to do this is a tricky question. After all, it varies greatly depending on how far you’ve journeyed through life. So to make things a little simpler, we’ve put together this easy-to-follow guide on making sure your golden years are rich and fulfilling.
Follow our decade-by-decade guide below…
›› IN YOUR 20s
• Focus on clearing your debts
• But make sure you have a plan
• Then save what you afford
In your twenties you probably have your first proper job with a proper salary. But retirement will seem a long way in the future. At this stage, it’s reasonable to allow other financial objectives to take priority.
Those in their 20s should first look into repaying any student debt, especially more expensive bank and credit card debt, cover all living costs, and then see if there’s enough left to squirrel some away.
How to pick the best Investment Vehicle
Starting a pension this early is a great way to build up a bigger retirement fund for later in life, as you add more contributions over your lifetime and they have longer to grow. Even if you can only afford a small amount, this is about forming a healthy savings habit.’
One of the best places for younger adults to put savings is a Mutual Fund.
It might be better practice to save using a Mutual Fund where you are still building financial resources for the future but have greater flexibility in terms of access to the money.
›› IN YOUR 30s
• Reassess your debts and outgoings
• Join your company pension scheme as soon as possible (Tier 3) if available
• Think long-term with your investments.
So you’re in your 30s. This can be a busy decade from a financial perspective. All of us face new challenges, with the costs to go with them. You may be getting married, starting a family or buying your first house or Car. Or a combination of the four.
First things first, then: re-establish what debt you have and find ways to address it. Once you’ve done this, you should ask yourself a set of questions: 1. Do you now have your own family to consider? 2. Do you have sufficient ‘rainy day’ savings? 3. Have you bought / are you looking into buying a house or a Car?
This should help you establish an overview of your key financial outgoings. There is a fine balance to be struck between saving for the future and paying off debt, particularly expensive unsecured debt such as personal loans.
Once this is done, there’s no time to waste. Explore your retirement saving options as soon as you can. Your first point of call should be to find out if your company offers a pension scheme (Tier 3). If so, they’ll make contributions on your behalf. This is effectively a pay rise if you don’t take it, you’re turning down free money.
Make sure you are a member of your company pension scheme if one is offered and take an interest in how this money is being invested. Too many pension scheme members select the default investment option rather than something tailored to your own financial objectives.
Take a long term view on your pension investments. You can afford to take on more risk in the form of shares – as there is a high chance this will pay off in 30 years’ time. The old adage, ‘shares outperform savings accounts in the long run’, still rings true.
But remember, retirement planning is about more than just building a big pension fund – make sure your budget is under control and clear debts where possible.
›› IN YOUR 40s
• If you haven’t started saving, do something about it!
• Keep building your earning capacity
• Your earnings should be peaking – dedicate more to a pension
Ideally, by the time you reach your 40s you’ll already have built up some retirement savings, whether in the form of savings or a company or personal scheme.
But if you haven’t already started, it’s not too late. It will just require more effort. This is a crucial time for your retirement planning, and it’s imperative that you act now. Your earnings are likely to be approaching their highest during this decade, and you should now be on top of your debts. All in all, you should be in a good position to start dedicating some real money towards planning for the future.
Make the most of pay rises and bonuses to boost your retirement savings, rather than simply increasing your expenditure each time. This is the time to take your retirement planning seriously, and that means having a target retirement age and understanding what your lifestyle will look like in retirement. You might not be able to paint an accurate picture of your retirement just yet, but you should be thinking about it in broad terms and making sure your financial plans are on track to deliver.
The least you should have is a personal savings. Keep contributing to this over the years and try to build up your tax-free savings. Crucially you’ll need to start planning the sort of income you expect to receive in retirement. If you plan to pack it all in early, then factor this into your thinking and make sure you increase your savings contributions.
›› IN YOUR 50s
• Maximise your contributions
• Remove risk from your pension investment plan
• Consider investing in government security for greater safety
Right, it’s time to get serious. This decade is perhaps the most important of all when it comes to retirement planning. Firstly, do you have a retirement date in mind? It might not be definitive, but it should serve as a guide. Then calculate the sort of income you want. Perhaps work out a minimum amount you will like to live on.
Next, take a detailed look at your pension and where it’s invested. You’ll need to be positioning your pension fund for your choice of retirement income option.
If you are likely to purchase an annuity when you retire, you should be phasing out volatility from your pension fund so there is less risk of a big dip in value a short time before you take benefits.
Take money out of risky equities and put it into safer cash investments (Money Market). There could be nothing worse at this time than seeing a stock market lurch take a chunk out of your pot just as you’re about to dig in.
Hopefully, you’ll have accumulated a sizeable pension fund by this age. If this is the case for you, consider using a Self Invested Personal Pension (SIPP) to exercise greater control over the way in which it is invested.
Consider maximising your contributions, too. Particularly if you are a higher rate taxpayer (remember that pensions can be tax-efficient). You may have grown up children you wish to support financially, but try to strike the balance. If, and when you purchase an annuity, this can make a serious difference to your annual income.
›› IN YOUR 60s
• Check that all your debts, including mortgage, are in order
• Decide on whether you’ll buy an annuity immediately or take draw down
• Talk to an Investment Advisor before you take any action.
You’re almost there. During this decade you will be making important decisions about how your pension fund produces cash and income in retirement.
‘These are often lasting decisions that can have a major impact on your finances in later life, so it is the time to seek expert independent financial advice.
This is particularly true in the case of annuities, where the options are varied. Essentially annuities are like insurance in reverse – you hand over a large lump sum (your pension pot) to an annuity provider, and they give you regular monthly payments in return for the rest of your life.
You may qualify for a higher annuity rate if you are a smoker or have an illness. This is called an enhanced annuity. It’s important to make sure all your debts are in order. Hopefully you will have been able, or are close, to paying off your mortgage, but what about children on your payroll? Are you still supporting them and their young families? These are important issues you need to discuss with your Investment Advisor.