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March 28th, 2013

Planning for retirement


Retirement planning can be more intimidating than any other personal finance topic. And with good reason: picture yourself at the end of your working years with family in tow and you are able to keep the lifestyle you had enjoyed during that period. You are well equipped financially to handle all your expenses, treat yourself to some fine dining  and take Mrs. Retiree on that long transatlantic cruise you promised when you were  still working.

Now, imagine yourself in retirement with all your family commitments, bill payments, university fees for your teenaged children and home repair expenses. But in this scenario you are struggling financially and not able to enjoy the lifestyle you maintained in the early days. To make matters worse, you are not in the pink of health and confronted by mounting medical expenses. Which of these two scenarios do you find more appealing?  Of course, the one that brings comfort and peace of mind.   How do you achieve it then?

A common habit among employed persons is to place significant reliance on a company’s pension plan to provide for retirement. Similar reliance is often placed on NIS contributions and old age pension to meet their retirement obligations. However, this does not eradicate the need to build one’s own retirement investment portfolio.

Planning not to retire is not a retirement strategy. There are practical realities, and unforeseen circumstances, especially as we get older. Taking a look at your sources of income for retirement well in advance will prompt you to identify some other opportunities for earning income. Perhaps you are an excellent baker or handy at carpentry. You can prepare yourself to rely on these skills for additional income when you are no longer at the office.

On the expense side, you will need to consider a few factors since expenses may vary according to your social circumstances, social lifestyle, longevity, healthcare issues and inflation which reduces the value of your dollar over time. As a result your retirement assets must grow at least as fast as inflation in order to keep up.

As in all successful ventures, the foundation of a good retirement is planning. The composition of the investment portfolio will depend on several factors including your risk appetite, financial position, current age and target retirement age. Such a portfolio may include stocks, bonds, mutual funds and other assets.

At the Unit Trust there is an array of retirement funds to suit your portfolio, even if you are looking at retirement for the first time. UTC’s Pension Plus, the Individual Retirement Unit Account (IRUA) and the Universal Retirement Fund whose funds are invested in stocks, bonds and money market instruments and are avenues to build your retirement savings over the long term.

As retirement approaches, the allocation to equities in one’s portfolio should be reduced as you may want to preserve your wealth and reduce exposure to the volatility of stocks.  Investors may want to manage risk by investing in fixed income instruments such as Treasury Bills (T-Bills) and high-quality bonds via bond or income mutual funds, such as the UTC’s Global Bond Fund and UTC’s US$ Income Fund.  A bond fund such as UTC’s Global Bond Fund can generate income as well as potential for capital appreciation. 

Remember that the single best way for investors to protect themselves from risk is to spread their portfolio across several different investments. Such asset class diversification allows investors to limit their risks by reducing the effect of a possible decline in the value of one any asset class or security, so if one asset class or security underperforms the others can offset the impact. 

The investment professionals at the Unit Trust will work with you on retirement aspirations to design and craft a plan that will work in your best interest and see that your level of risk is appropriate to your situation.  You must plan ahead of your retirement so that you can enjoy it in comfort. Don’t be caught playing catch up because you may not be able to recover. And remember, putting your finances in order is important for your family. Your investment of time, affection and security for your loved ones during your working years could repay you with rich dividends in your golden years.