Saving for Retirement
Its Never too Soon to Start Planning
By Richard Ryland
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This article on saving for retirement is written for age well.org against the background of continuing doom and gloom in the financial markets.
What then about the aging population?
It may seem extremely strange to say but most governments’ do not have funded pension pots for state pensions. This means that each elected government inherits a spending commitment of a state pension.
Unfortunately for western governments improved health status in the aging population has seen people living much longer. This in turn means an increased need to raise more money coming into government’s coffers, which in turn means considering highly unpopular increased taxes. The alternative strategy is to reduce the state pension burden either by increasing the retirement age or by giving less protection against inflation (or both).
In many countries state pensions are at differing levels because of different historical and cultural pasts. This in turn means governments with high levels of state pension provision argue that the value should be allowed by inflation to degrade to come into line with comparable countries pension provision. This in turn means all state pension provision is under attack with a leveling down in process.
The situation is compounded by the fact that company pensions have been generally underfunded and again people living longer has financially stressed companies who generally respond by reducing pension provision. This is now a mounting crisis for the western world.
The only answer to reduced state pension provision is self-help, personal saving for retirement, increased contributions to private pensions or alternative individual income provision.
This article discusses the issues.
The Future and Planning
At the heart of the issue is future planning. It is said a finance expert was once asked where he invested most of his money. The financial expert responded by saying, I invest heavily in the future because I plan to spend a lot of my life living there. Most people are not long term planners.
All too often the attitude of most people is that something will turn up when they retire. With this attitude they put off saving for retirement or don't do it at all.
Most people go through a time when they are earning enough to buy consumer goods and cars and houses. The argument now is that whenever we are earning we should think about our future financial health and also think about saving for retirement. In general the earlier saving for retirement is started the more effective will retirement benefit be. It is also important to keep debt levels low and reduce debt and eliminate debt whenever possible. In an uncertain world living beyond one’s means is a recipe for disaster.
Gambling on a Pension
We should be honest about retirement provision. Saving for retirement is always a gamble. If we save into a private pension scheme the pension providers calculate how long you are, on average, likely to live. Whilst refinements to this approach is on the way this crude approach means smokers and obese people are likely to lose out because they tend to die younger.
With the average man (or woman) saving into a private pension the age average may be, say, 80 years of age. This means in theory if you die before 80 you have over-funded your pension, but if you live beyond 80 you are gaining value at the expense of other people in the risk pool dying before aged 80.
Pensions and Choices
There are also choices about how you receive your private pension income. This really requires you to make a guess about the way inflation will erode your pension. A normal flat pension will be eroded by inflation.
Even an escalating pension will be eroded by inflation if your long term guess is wrong. In an escalating pension the bigger the yearly increase means the lower will be the starting point. Therefore a flat pension with the same fund may pay 3,000 per year in the local currency but a 3% increasing pension may start at 2,000 per year and a 5% increasing pension at 1,000 per year. Again it is always a gamble on whether you will get all your money back.
There are alternatives to private pensions to maintain financial health, which include investing in bonds or property to provide an alternative income in retirement.
The problem with property is that rental incomes are heavily dependent on the general economy and property values rise and fall with the general economy. Therefore if retirement is planned during a fall in rents and or property values the retiree may lose out on their planned income. To provide rents, property also require active management meaning a sort of semi-retirement. In other words property too is a gamble.
Bonds provide another alternative to private pensions but are also affected by the general economy.
Finally there is the investment of substantial savings in cash and living off the interest. Again interest levels tend to be affected by the general economy and over time it becomes difficult to stop the balance being eroded. Once the balance is eroded in value, say by inflation, the income will reduce.
Three Big Issues
This article has attempted to give an over view. We are all living longer and pension provision is under attack from all sides. We need to manage debts better and increase our private retirement provision.
We face three big issues:
Firstly, we need governments to manage inflation down to protect our purchasing value and our financial health.
Secondly, we should accept that generally tax increases are needed to fund better state pension but tax increases are highly unpopular. Most people want super services but do not want to pay increased taxes.
Thirdly, we are living in an uncertain world with governments increasingly less willing to help individuals with no provision. The only answer to reduced government provision is more self-help. This may mean increasingly that people who cannot make provision either receive nothing or a very low income.
Hopefully, realizing that the State is not going to provide will stimulate people to take responsibility for their own financial health and begin saving for retirement.
Getting Involved and Planning
We should all take more of an interest in politics and pressure politicians for what we want.
Everybody’s vote counts but only if you vote!
Plan your retirement, nurture your financial health, and your choices can be ranging from grinding poverty through to decades of holidays.
It is argued if you can do something to retire more comfortably it is never too soon to start.
age-well.org > retirement planning > saving for retirement
*Richard K Ryland is a former Registered Mental Nurse, General Nurse and Nurse Teacher from the United Kingdom. Richard also holds a Bachelor’s degree in psychology and a Master of Science in Nursing.
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