June 26th, 2015

Retirement and You

 

Balancing the realities of an ageing population and increased life expectancy means that for the modern Trinbagonian, retirement may no longer be guaranteed but now, a matter of prudent investment. As life expectancy increases, the need for extended retirement planning has become a matter of necessity. The current age of retirement in Trinidad and Tobago is standardized at 60 years of age. While this has been the subject of active debate, it also seems unlikely to change in the near future. The most recent data (sourced from Trinidad and Tobago’s own National Financial Literacy Programme) illustrates that as far back as 2006, persons 60 years old and over numbered 130,000 or 10 % of the population, compared to 87,000 or 8.0% of the population in 1980.

These realities mean that proper and prudent retirement planning should become part of our daily work life. The real need for this type of foresight in retirement planning comes specifically from:

  1. The risk of inflation. This risk is real, and is one that can erode savings over time. Prudent investment of savings in investment products that are specifically designed as inflationary hedges will minimize this risk.
  2. To protect against the unforeseen events and large expenses in post-retirement years. This likely applies to large ticket items such as home loans, which should be fully repaid in advance of retirement.
  3. Advancing years and failing health go hand in hand. One of the main measures one needs to take in planning for retirement is anticipating the need for increased health services costs in old age.

In a perfect world, we would all start our retirement planning at the inception of work life. However, Trinidad and Tobago is one of the party capitals of the modern Caribbean and many if not most young people have not flagged inflation as an issue for immediate attention. However, just because we haven’t begun planning at age 20 there is no need to despair. For instance, if we are to assume a retirement age of 60, we can assume that the individual over the life of employment should have:

  • 480 paychecks to retirement, should they begin planning at age 20;
  • 360 paychecks to retirement, should they begin planning at age 30; and
  • 240 paychecks to retirement, should they begin planning at age 40.

The earlier the start date, the greater the ability to accommodate a more aggressive structure in your portfolio. This can allow for higher rates of return, as well as a longer recovery period if your proposed portfolio does not perform as planned.

The development of a personal retirement plan requires the individual to assess the type of risk that they are willing to undertake in order to reap the best reward and support a desired post-retirement lifestyle. As we have previously mentioned this will also be strongly influenced by the time-horizon to retirement. The important points to remember in developing the portfolio structure you desire are:

Diversification of portfolio

There are a number of assets which you can include in your portfolio. Namely:

  1. Fixed Deposits and Other Savings Accounts/Plans;
  2. Treasury Bills;

3 Government Bonds;

  1. Money Market Funds;
  2. Stocks and Shares;
  3. Equity-based Mutual Funds;
  4. Annuities; and
  5. Entrepreneurial Pursuits.

These instruments will vary according to their projected returns. Equity prices are more volatile than fixed income instruments and there is no guarantee of a payout from an equity product. Therefore, it is generally considered “safer” for a retiree to invest in less volatile instruments.

Ideally, in order to safeguard capital, there should be a diversification of the personal retirement portfolio among these instruments. Thus will allow the retiree to protect capital (by investing in safer long term instruments) as well as generate higher rates of return (by investing in some higher risk equity based assets).

Maintaining a stable saving level

While we plan for retirement, it is important to ensure that there is enough liquid assets available to cover basic monthly expenses. It is usually difficult to determine what will be required on a monthly basis to protect against the uncertainty of post-retirement expenses. This is due to the fact that there are a number of unknowns–how long our viable working life will be, how the global investment market will perform, what unforeseen events will be thrown our way and our life expectancy. Therefore, it is best to be as conservative as possible while maintaining a level of disposable income that can ensure stable quality of life. It is important to factor in the concept of the replacement rate. This is the percentage of your salary that you’ll receive in retirement benefit after you retirement. For instance, if your annual salary was in the range of $120,000 and retirement payments are $50,000, then your replacement rate is 41.67%, which is going to be too low for most people.

Focus on your future

Personal empowerment is key in retirement planning. This means that individuals should seek out knowledge of the various tools and investment options that are available for retirement. With renewed emphasis on financial literacy, there is a wealth of information available online or through local governmental organizations (see the National Financial Literacy Programme, The Trinidad and Tobago Association of Retired Persons (TTARP) and The Government Pensioners Association of Trinidad and Tobago (GPATT)).

Mindful of the foregoing the Unit Trust Corporation has developed a suite of investment products which aregeared specifically towards retirement,and are investedmainly in local securities.These are the Universal Retirement Fund, the Individual Retirement Unit Account and Pensions Plus.The Universal Retirement Fund, for instance has shown consistent performance over the last five years with net return to Unitholders averaging 6.76% in an often unstable market. , Year to Date Net Return to our Unitholders of 2.17% as at May 31st 2015.

While personal discipline is ultimately the master key of a proper retirement plan, one does not have to go it alone. Representatives of the UTC’s Advisory Services Department are available to develop a comprehensive retirement plan that is unique to you. Also, customers can feel free to speak to any of our Customer Service Representatives at our Investment Centers throughout Trinidad and Tobago for general guidance on planning for the golden years.