Sunday 2nd September, 2007


Plan pension to retire in comfort

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Gap analysis is a technique used in the corporate world to measure where an organisation is at present, compared to where it should be in terms of long-term goals.

We can use this technique to see if we are on track with our long-term goals.

We can take a first cue from the provisions for pensions and pension savings in the recent budget.

Of immediate impact to those who are still saving for retirement is the increase in the deductible allowance for contributions to pension and annuity plans.

This used to be $12,000 per year, and will be raised to $25,000.

This represents a recalculation of what is required now, in order to retire in comfort. The recommendation is that we have to more than double our savings.

Put another way, if a young person aged 43, was saving $1,000 per month for his pension, he should now be saving $2,084 each month. In fact, the implementation of this savings measure is so critical, that the Government is giving an incentive: a refund of up to 25 per cent of pension savings.

How will this manifest in the long term? A 43-year-old saving $1,000 per month, at competitive rates, will accumulate $1 million by age 65. This would give him a lumpsum upfront of about quarter million dollars at age 65, and a cheque for $6,500 every month for as long as he lives.

This implies that we will need more than double that amount in order to maintain his comfort in old age.

Let's compute actual figures based on today's rates and incentives. If he puts aside $25,000 for his pensions each year, the total accumulation will be in the vicinity of $2.1 million.

Such an accumulation would have cost him $416,250 over the years to age 65.

In 22 years' time, from that $2.1 million, he would receive an upfront lumpsum of $525,000 and a cheque for $14,400 every month, until death.

There is also a guarantee provision that allows the monthly cheques to be paid to somebody else, a beneficiary, if the retiree dies before ten years has elapsed.

The cheques will be paid to somebody for a minimum of ten years. If the retiree does not die, but continues to live to 100 years, the monthly cheques will continue to him for 35 years.

Of course, it also is possible to select a longer guarantee period of, say, 15 years or a shorter one of five years.

There was another signal in the budget about the urgency. It came from the immediate upward adjustment of the old age pension, now renamed the Senior Citizens Grant.

In addition, the NIS pension payment will double from $1,000 per month to $2,000 per month from 2008.

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