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Pensions versus investments for retirement

Bill Storie, CEO of the Olderhood Group

The National Pension Scheme (Occupational Pensions) Act 1998 as amended (the “Act”) became operative on January 1, 2000. This was a good thing.It made people aware of their financial future long before they would otherwise have thought about it, especially retirement. People in their 20s, 30s, 40s and even into their 50s rarely considered pension planning until it was too late. As they approached 60, they suddenly began to think about what their financial life would look like in retirement. Truth be told, they started to worry about whether they would have enough money to live. This reality became even more pronounced as they also realised that the so-called “life expectancy dividend” could very well apply to them. Images of life in their 90s came into view. Yikes.I’m not here to discuss the various intricacies of how pensions work — I’ll leave that to those who know better than me. On the contrary, I will discuss the serious impact of not having enough pension income and how that will unquestionably affect your lifestyle as you get older. Knowing the mechanics of pensions is fine, but people desperately need to know more about the impact of poor pension planning — and more to the point, why their pensions will simply not be enough. A scare tactic you say — nope. I don’t do that. But I do tell the truth. And sometimes it hurts.Pension planning is more, much more, than making sure you make your contributions (and your employer) each month, randomly choosing a mutual fund structure, then deciding on annuity or drawdown at retirement time. Your future life in paradise could become a fool’s paradise. Caveat emptor.First things first — get an idea of what — at current contribution rates and estimates of pension fund investing — your pension will provide at retirement. Don’t wait until the week before you retire. Do it now. Yes, it is just an estimate, but get an idea. That will likely tell you that if that’s all you will have as income in retirement, your life will be miserable.So, step two — understand how to save for the future. Get an idea how to save better, more regularly and to increase your savings as you get older. Start to understand how investing works to build your investment portfolio. Don’t be put off when the words “investment portfolio” are used. They don’t only apply to “others”. They apply to you.Understand how to structure your savings using various vehicles — savings accounts, mutual funds, stocks, bonds and so forth. Maybe you need a wise investment manager to help you. Okay, go for it.Understand how to structure your investment portfolio (see, you can use those words) to build investment growth in your earlier years and then adjust it to provide cashflow in your retirement years. Cashflow in retirement is king.So why are we doing this? Simple. If your pension will not be enough to sustain your retirement life, you will need income from other sources. The idea of part-time work sounds great, but as you get older and the old bones are slow to get out of bed in the morning, the notion of working part-time, because you need the income, starts to get annoying. A burden you don’t want.In other words, plan to have pension income and investment income in your later years.Your retirement years are precious. It is the last phase of your life. It is the time to enjoy and be happy. You have worked hard and now it’s your turn.But if that world cruise you planned 20 years ago is no longer affordable, because your retirement income isn’t enough and you don’t know how long you have to stretch your retirement fund out for, because you don’t know how long you’re going to live — you have a dilemma.Those of us in retirement are frugal. No, not cheap, just frugal. We are careful about spending money. All fine and dandy for those friends who are still employed saying: “Let’s do lunch.” If they’re paying, we’re there. If not, we use the rain check tactic. Don’t mock it — one day you’ll be in retirement yourself — and you’ll find out.It is critical to ensure your retirement income provides the lifestyle you want. It may not be first class all the way (but in retirement we don’t care). Just as long as we can enjoy our life, we’ll go anyway.So, get to grips with your pension planning and equally, if not more importantly, get to grips with your investment portfolio (you’re comfortable saying that now, aren’t you?). But above all else, start to visualise the good and the bad of life in retirement. Yes, money is the foundation of retirement and understanding the mechanics of pensions, investments etc is essential — but please, please, please, realise there is life beyond the arithmetic. Bill Storie is chief executive of The Olderhood Group Ltd, Bermuda and is a CA (Scotland). He is also producer and host of the Olderhood Radio podcasts, which can be found on The Royal Gazette website. For more information, visit www.olderhoodgroup.com