“I’m 24 years old and I just started working with a small company that doesn’t offer a pension plan. I’m a little worried about this, and I want to start saving on my own. How can I go about investing for my retirement?”

Congrats on taking the initiative to start investing on your own for your retirement. Many Jamaicans put off planning for this big lifestyle change until a few years before they’re ready to retire.

At that point, they usually are a little panic-stricken when they realize that their steady income will cease in a few years, and they don’t have any idea how they are going to replace it.

In times gone by people would expect their children to take care of their needs in retirement, but more and more we’re seeing elderly parents still assuming responsibility for their adult children’s expenses. Even if you are in a company pension scheme, very often the amount that you’ll receive in retirement won’t be sufficient to meet your needs.

Whether you’re just starting out in the workforce, or you’re facing retirement sooner than you’d like, it’s very important to make a plan to ensure that you’ll be able to face these years with confidence. Here are some guidelines that help you to retire without worry:

1.   Seek financial advice

You don’t have to figure out how to plan for your retirement on your own. In fact, if you try to invest without expert advice for this goal, you’ll probably end up confused and uncertain.

Financial advisors will take into consideration all your goals, your comfort level with risk, your time horizon and the amount you can invest, in order to design a plan that’s right for you. They will be able to recommend the appropriate types of investments that will help you to meet your goal. You can look for an investment company that offers free financial advice.

2.   Calculate how much retirement income you will need

Your retirement expenses should be about 70 to 80 per cent of your current expenses. In order to plan how much you’re required to save now to meet your goal, you have to project how much money you will actually need to spend in the future. To arrive at the figure you will need to consider:

• What’s your planned retirement age?
• How long will you need a retirement income?
• What effect will inflation have on the value of your money in the future?

In fact, rising inflation is one of the things that prevent retirees from living comfortably, as they did not consider how much it would affect the cost of goods and services. The financial advisor will help you to work out these projected figures.

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3.   Start early

By making an effort to plan early, you’ll be in a pretty good position to retire stress-free. Time and the magic of compounding can help even a small monthly savings amount turn into a comfortable nest egg by age sixty. Let’s look at an example of how sooner is better when it comes to retirement planning:

Thirty-five year old Muna has just started to invest towards her retirement at age 60. She wants to have an income of J$600,000 (which will be adjusted to reflect inflation of 10% per annum) each year for 30 years of retirement.

She will have to invest over J$450,000 every year at an average return of 12.5 per cent, plus increase her annual savings by the inflation rate, in order to achieve her goal. On the other hand, twenty-five year old Marisa, who also has a similar retirement goal, will only need to invest about J$160,000 per year, using the same assumptions.

4.   Review your plan

After you’ve decided on an investment plan that should provide you with the necessary retirement income, you still need to review the strategy regularly with your advisor. This is especially crucial as you get closer to retirement age. Important details like differences in interest rates, major changes in the economy, and lifestyle adjustments may have affected the projections in the original plan.

You may have to reconsider some of the recommendations in order to ensure that you are still on target in creating the retirement of your dreams.

Copyright © 2007 Cherryl Hanson Simpson. No reproduction without written consent.

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Originally published in The Daily Observer, February 01, 2007

Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl