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Business

Most 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 the following:

* Eventually, 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?

Retirement planning 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.

Unfortunately, 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 better.

Inflation is 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 a year.

* 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.

Inflation has 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.

E.g. interest income (net of taxes), rental income (net of repairs) dividend income etc.

* Any other financial obligations?

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 plan.
Financial obligations can be:

a) Children's 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.

After evaluating 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.

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