Happy ending with a timely retirement plan

By Romesh Angunawela

Did you know that 58 % of the Sri Lankan labour force is yet without a retirement plan? Are you among them? If so, it's time to get your retirement picture in focus.

A proper retirement plan is of utmost importance, as it will enable you to lead a lifestyle that you desire. It is estimated that in just 20 years Sri Lanka's 60 and over population will stand at 4 million from today's figure of 1.9 million. It is also estimated that the under 15 age group will amount to only 18.9 % of the total population to today's figure of 31.4%.

Q: What do the above figures signal to the workforce which is to retire in 20 years?

A: Well! It clearly indicates that even those who are currently covered under a government pension plan (E.g. PSPF, W.O.F. etc.) are also in troubled waters if they don't plan early for their retirement as the benefits under a retirement plan is being paid to the retirees off the taxes that are collected from the current workforce. So, as mentioned above, if the workforce is to deteriorate by almost 50 % and if the number of retirees are to double, the government will not have enough cash to support such payments unless the tax rates are increased, etc.

Q: How does retirement schemes work?

A: You take upon yourself to contribute to a retirement plan on a regular basis (e.g. monthly, quarterly, yearly) or on a lump-sum basis during your productive working years in order to provide you with an income at retirement. However, there are important aspects to consider when choosing a proper plan.

Q: How do I plan for my retirement?

A: As in all saving habits, the earlier you start to save the better. (E.g. In the case of a 35 year-old and a 40 year-old planning to put aside Rs. 5,000 per annum at the rate of 12 % per annum for their retirement at age 60, the 35 year-old will accumulate Rs. 666,000 against the 40 year-old's accumulation of only Rs. 377,000). The magic of saving starts to work when you discipline yourself with a sheer dedication to save on a regular basis. It is important to find out as to what kind of income would be sufficient to lead a comfortable retirement. In this context, serious thought should be given to the following areas:

* How much have you already saved for your retirement?

* How much do you expect to receive in government benefits/corporate benefits (pension, etc.) at retirement?

* Do you have any future income potential (e.g. rent income, dividend income, interest income, etc.)

* Do you feel that the answers to the above question will adequately cover at least 70 % of your current income? If not, your plan needs to be adjusted to meet the challenges of the future. There are also some hidden costs that need your immediate attention. They are as follows:

* Inflation

* Taxes

* Life expectancy

* Cost of medical care

Inflation erodes purchasing power and it should not be ignored at any cost. Sri Lanka's inflation has been as high as 26.1 % and it significantly dampens investment returns. The best theory in protecting purchasing power is to have your investments indexed properly.

Taxes can also reduce your disposable income at retirement and provisions should be in place to protect such events.

Life Expectancy - People more often plan to live a shorter life than what they ultimately end up living, and moreover, they plan their retirement for such short terms and face a bitter struggle trying to support themselves. (E.g. a person may structure his retirement plan to support payment only upto his 70th birthday but might end up living upto age 80, facing a problem of not being able to draw funds to support the additional ten years). 

Sri Lanka's life expectancy for men and women stood at 56 and 55 years in 1950 and is currently 71 and 75 years, respectively.

Medical Care

Cost of medical care should not be ignored as the cost involved is continuously rising as you age. If no arrangements are made to have a proper health scheme in place this can wipe out your savings. (E.g. surgery, post- surgery treatment, etc. which can be costly and subsequently may require treatment overseas.)

The de Silva's need to find out whether such income (Rs. 70,000) at retirement would be adequate, taking into account the inflation rate, the high cost involved in medical care, the availability of time to pursue their hobbies (e.g. golf, vacations) and the significant concern that revolves around the possibility of the government being able to sustain the expected pension due to the demographic change that was discussed earlier. Therefore, it is always best to look into the worse case scenario when planning for your retirement and the de Silva's should plan for Rs. 70,000 at retirement instead of the deficit of Rs. 44,500.

When structuring a comprehensive retirement plan one should take all income and expenses into account. This can be broken into two areas - the current and the expected income and expenses. It is important for the de Silva's to look into their current monthly expenses as this will enable them to find out whether they have a positive balance that could be utilised to fund their expected income at retirement. 

It is of utmost importance to find out whether the Rs. 20,000 that will be saved on a regular basis will ultimately provide them with an income of Rs. 70,000 in today's value when indexed for inflation. 

However, if the de Silva's don't have a positive balance that they could save for their future objective it is important for them to find out the areas that they have unnecessary expenses, in order to limit such expenses and to divert such money towards future retirement income. (E.g. If the de Silva's have a current expense of Rs. 100,000 of which Rs. 20,000 is utilised for entertainment).

Planning for retirement is crucial, and moreover, planning early for retirement is, however, the best solution one could adopt in order to lead a comfortable lifestyle. However, proper advice should be sought as retirement requirements vary from person to person.

Features

Package of incentives to boost exports

Trade and Industrial Development Minister, Ronnie de Mel, announcing the new measures, said these would help to alleviate the problems of exporters.

The state-run Export Development Board (EDB), at the first meeting of the revived Exporters' Forum, said the new package to the export trade includes cheaper credit facilities and other benefits.

Under an interest rate subsidy scheme, the EDB will reimburse six percent of the interest component on working capital and project-related loans extended by commercial banks, which normally lend at 13-14 percent. "In such a situation, the actual rate of interest to the exporter would be 7-8 percent," said Felix Yahampath, EDB chairman.

In the other incentive scheme, exporters are entitled to an incentive equal (in Sri Lankan rupees) to the incremental value of their exports over a three-month period effective from November 2001. This means any exporter who has increased his export values over the three months to October 2000 compared with the preceding three-month period would be entitled to a similar amount in rupees as a grant from the EDB.

Exporters of tea, rubber and coconut in raw form, gems, apparel and diamonds will not qualify under this scheme.

But when exporters sought clarification on the incentive, the EDB agreed to a suggestion by the minister that a high-level committee should be appointed to work out the modalities of these schemes. De Mel said Sri Lanka's economic growth rate would be one percent or less this year. "This year has been a very difficult year. Growth rates would be one percent or slightly lower compared to a comfortable six percent posted last year," the minister told the Exporters' Forum.

The EDB has revived the forum which was very popular in the 1980s in bringing together exporters and government officials with a view to solving the problems of the former. Its next meeting is on January 30 and de Mel hoped the process would continue even if he was replaced by a new minister.

De Mel, a veteran finance minister between 1977 and 1988, said 2000 was an exceptional year for Sri Lanka with export sector growth up 25 percent and apparel sector growth up 24 percent. Exports have gone down and a drastic overall fall is expected this year."

The minister said the international war against terrorism was adding to Sri Lanka problems, which is already plagued by an 18-year ethnic conflict. Tamil rebels attacks on the Colombo airport in July devastated the tourist industry and led to Sri Lanka being tagged as a war risk country. That sent insurance premiums sharply up on air and sea cargo in addition to rising costs of air tickets.

He said the government was also close to finalising a US$ 75 million-credit line from the ADB for small and medium enterprises. An official delegation is due to visit Manila in the next few weeks in this connection.

Gross Domestic Product (GDP) figures in the first and second quarters slipped to 1.4 percent and 0.4 percent respectively, compared to 7.3 and 6 percent for the same periods last year.

Sri Lanka has not experienced such low growth since 1956 and 1971, when the annual rates fell to 0.7 and 0.2 percent, respectively.

Central Bank officials said last month growth for the year would be around two percent. Private analysts, however, have forecast zero or negative figures. The Ceylon Chamber of Commerce Economic Intelligence Unit has a predicted 0.6 percent growth for the year.

WTO parley in Qatar a non-starter – Ronnie de Mel

"This meeting is a non-starter. There is little or no impact that small countries like Sri Lanka can make on meetings like this. All other trade blocks have made their (powerful) responses except SAARC which Sri Lanka belongs to," he said.

He was responding to a question from Ceylon Chamber of Commerce Chairman, Chandra Jayaratne, as to what Sri Lanka's stand would be at the meeting. The minister said while he was not attending the Qatar meeting, due to the current election campaign here, Sri Lanka would be represented by officials.

Salient features of the EDB's export incentive scheme:

* It is hoped to implement the scheme for exports from mid-November. The scheme will be valid for six months and reviewed thereafter.

* It is proposed to implement the scheme through commercial banks. Details of the scheme will be worked out in association with the banks and the trade and will be circulated to exporters by the end of the month.

* All exporters of value added export products except tea, rubber and coconut in primary form, gems, apparel and diamonds will qualify for assistance.

* The EDB has already commenced implementation of a package of assistance equaling Rs. 250 million to the apparel sector, the diamonds sector and the gems and jewellery sector based on business development plans prepared by these sectors. Therefore they are excluded.

Salient features of the interest rate subsidy scheme:

* The EDB will bear 6 % of the interest component on working capital project related loans extended by commercial banks which lend at 13%-14%. The responsibility of negotiating the loan lies with the exporter.

* EDB has had discussions with the NDB and the DFCC on this matter. Details of the scheme will be worked out in consultation with the banks and trade and will be circulated to the exporters before November 15.

* SMEs of value added export products except tea, rubber and coconut in primary form, gems, apparel and diamonds will qualify for assistance.

* The scheme will be valid for one year and reviewed thereafter.

World Bank Fund strikes CO2 deal

The deals are the first struck by the PCF in line with the Clean Development Mechanism (CDM), details of which are currently being deliberated at U.N. climate talks in Marrakech, Morocco.

The CDM is part of three mechanisms established under the Kyoto Protocol that developed countries may use to lower the cost of meeting their emission reduction targets. The World Bank is emphasising that sustainable development of developing countries and efficient reduction of greenhouse gas emissions would be compatible.

"We are creating a new mechanism that can enter the market," the World Bank's Ken Newcombe, manager of the "Prototype Carbon Fund" (PCF), is quoted as saying. "Emissions that our shareholders (the 17 companies plus the governments of Japan, Canada, Norway, Sweden, Finland and the Netherlands) intend to purchase are destined either to help meet their targets or, as there are banks involved, they could inject them into global trade."

Presenting the scheme's first annual report, Newcombe gave examples of where its $35 million resources were being spent - a plan to buy $3.9 million of emission reductions over the next 15-20 years from two small hydro projects in Uganda.