Sri Lankans have no retirement plan
By Romesh Angunawela
(The writer is a financial advisor)
If you have
been thinking of postponing your retirement plan or not taking much
interest in preparing for your retirement, it is time that you consider
everyone retires, with the exception of some being forced to retire
due to a serious illness or an accident.
* Whether you
have adequate savings to support your retirement needs as job opportunities
are rare at retirement.
* Are you counting
on depending on your children who will have their own goals to achieve,
which in turn will severely restrict their disposable income?
* Are you ignoring
the rising cost of medical treatment which will represent a large
proportion of your retirement income?
is definitely an important task that needs to be covered in any
individual's overall financial plan. However, planning early for
your retirement goals has always being the best method of overcoming
unexpected difficulties at retirement.
Sri Lanka has 58 percent of its population with no pension plan
of any sort. The current pension plans in existence (EPF, ETF, PSPF,
WOP) would definitely not meet your retirement needs as these funds
are poorly managed and are not indexed properly for inflation.
In order for
your retirement plan to be ready at retirement:
* Are you sure
you are investing enough for your retirement?
* Are your investment
returns meeting your expectations?
* Do you spend
your nights dreaming of a retirement free of worry, or do you toss
and turn in your sleep?
The only answer
you will want to hear is "Yes". But if you are uncertain
in any way, (for example: are your investment returns higher than
the inflation rate?), the sooner you begin to address these issues
the hidden enemy. It can seriously erode purchasing power. Many
people tend to ignore the effects of inflation. Let us look at an
example to better understand the effects of inflation.
Assume you invest
one million rupees in a bank which gives an interest of 10 percent
* At the end
of the first year your account balance would stand at (capital plus
interest) Rs. 1,100,000.00.
But if inflation
in that particular year was 12 percent then your overall return
would definitely surprise you.
* Account balance
- end of the year (capital+interest) =Rs. 1,100,000.00.
* Inflation at 12 percent a year (1,000,000 x 12%) =Rs. (120,000.00).
* Actual value of your initial capital =Rs. 980,000.00.
the capacity to eat up your capital. The million rupees in the beginning
of the year dropped to Rs. 980,000 with an inflation rate of 12
percent a year. Sri Lanka's inflation rate had been as high as 16
percent a year. So it is essential to take inflation into account
when planning for retirement.
There are four
major steps to evaluate when planning for your retirement.
* How much have
you saved for retirement?
The amount of
savings you already have will no doubt play an important role in
building the portfolio you require to support your retirement needs.
It is important to find out whether your savings are invested properly
in order to maximise your returns and to keep in line with your
risk tolerance. For example: If you are an individual with a poor
risk tolerance but have invested in an institution (e.g. finance
company, junk bonds) to gain a better interest rate (3-4 percent
higher than that paid by a conventional bank), it is time you change
your investment strategy as the present investment is not worth
the sleepless nights you have been having.
* How much do
you expect to receive in government / corporate pension plans?
Unfortunately, Sri Lankans do not have access to these figures under
the present government pension plans. Corporate plans and plans
from insurance companies generally specify the pension payable at
retirement. These figures will help reduce the savings required
at retirement to fund the retirement income needs. For example:
if your anticipated retirement income need is Rs. 100,000 a month
but at present you have a corporate/insurance plan which will pay
you Rs. 50,000 a month.
* What is your
future income potential?
Any future income
potential would significantly reduce your monthly commitment towards
your retirement income needs.
income (net of taxes), rental income (net of repairs) dividend income
* Any other
Any other financial
obligation or objective that you ignored at the time of planning
for your retirement needs can have a serious effect on your retirement
Financial obligations can be:
education costs in a foreign country.If you originally planned to
fund your child's education cost with US$ 10,000 which was not indexed
for inflation, rising cost of tuition fees, etc and were to find
out later on that you need US$ 200.000 instead of US$ 100,000, this
additional amount will have to come off from your retirement savings
plan which will definitely affect the overall plan.
b) If you suffer
a serious illness, this too can have a serious impact on your overall
financial plan if proper insurance planning is not in place.
the above it is important to structure a proper investment strategy
that will be monitored frequently to meet your retirement objectives.
However, it is advisable to sit down with a professional financial
advisor in order to structure the most appropriate plan for you.