I vividly remember dealing with a client many years ago at the financial institution where I worked. He was in his late-50s and wanted to put aside some funds for his retirement. Preparing to discuss investment options and strategies for this objective, I asked him how much money he had to start his plan.

He presented me with a cheque for just over J$150,000 (at that time, the equivalent of about US$2,400), and after I asked some pertinent questions, it became clear that this was the sum total of my client’s net worth. He explained that he had worked in the music industry for his entire life and had seen a lot of money pass through his hands, but had never thought about putting aside some of his earnings for the future.

As he continued to relate his sad story of business setbacks and personal challenges with a chronic illness, I realised that he had become despondent and was not really receptive to my ideas to improve his situation. Just before he left, he said, “I wish someone had taught me these things 20 years ago when it could have made a difference.”

My conversation with this client had a tremendous impact on me, as I was saddened at the thought that he would probably die alone and penniless. It also strengthened my resolve to help more people to learn financially smart habits that would prevent them from suffering the same fate as this unfortunate man.

Are you on target for retirement?

Last week we discussed the importance of facing your retirement reality. I know that many readers took on my challenge to get more clarity on what would be required to supply their retirement income needs. Some of you who tried the retirement simulators at www.financiallysmart.org are probably experiencing various degrees of worry or panic about your financial future.

Most people will find, as I did when I used the calculators, that it is very difficult to amass a large enough lump sum to provide sufficient income for over 20 years in retirement. Let’s assume that if you were retired today, you would need J$50,000 per month to cover your bills. You are 20 years away from retirement, and you think that you would live for about 25 years after retiring.

You anticipate an inflation rate of 10 per cent per annum, and estimate that you would receive an average net return of eight per cent every year on your retirement investments. What is the size of the lump sum that you would need to amass in order to meet your required cash outflow when you stop working?

Over J$126 million!

Plan to out-earn inflation

The problem is that inflation will continue to increase your initial J$600,000 income need every year prior to and during retirement. After 20 years, your annual spending requirement would be just over J$4 million. The harsh reality of the inflationary effects on the purchasing power of money is often overlooked, and that’s why many persons struggle to make ends meet in retirement.

Retirement planning involves designing a viable strategy, while you are employed, that will replace your income when you stop working. People often equate planning for retirement with the activity of saving only; but as we illustrated, many persons will find it difficult to put aside enough funds to meet their future needs.

Therefore, you need to create a realistic plan that will supply passive income from various sources that can outperform inflation. You will have to build assets that will generate cash flow over time, which will eventually replace the earnings that you get from physically working. This is the only way that you can hope to achieve your goal of retiring in comfort or style.

Increase your income flow

The key to your retirement success is having enough money flowing in to meet your needs. Building a savings nest egg is one way to create cash flow, but you also have to look at other types of investments. For example, retirees can use rental income from real estate or dividends from stocks, in addition to the interest on their savings accounts.

Another option is to develop a business that will supply you with an income even if you are not working. It doesn’t have to be a large corporation; you just need to create a sustainable business system that will generate cash flow without you. The Internet can provide everyone with various opportunities to earn income passively.

If you are on the brink of retiring from your job and your pension savings will be inadequate, then you may have to accept that you must continue to work for money. However, working beyond retirement can actually be enjoyable, if you look to your hobbies and talents as a means to produce income in a fulfilling way.

Your mission for this month is to learn more about retirement cash flow options. Read up on income generation ideas and try to find simple ways to earn more money part-time right now. Next month’s mission will provide more details about creating passive income streams.

Copyright © 2012 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, May 10, 2012

Read another article on Surviving Retirement:

Making Ends Meet in Retirement

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Cherryl is a money coach and business mentor, and founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmart.org. Contact Cherryl