It is alarming how very few Jamaicans make the requisite preparations to secure their financial futures in retirement. In fact, less than 97,000 Jamaicans out of a 1.3 million people labour force (61,400 of whom are past retirement age) have retirement funds. I can hear you saying, “Huh?!”, so let me break it down – ONLY 7.6% of the nation’s labour force (3.6% of our entire 2.71 million people population) are preparing for a life where they will no longer be able to work for a living.
Still not simple enough? Here’s my point: In the Jamaican labour force, retirement fund non-contributors outweigh contributors by a ratio of 13:1. These statistics are troubling and can be likened to a crisis. As is the case with all other crises, we simply must find a solution. Hence, this post – the main purpose of which will be to educate my fellow Jamaicans on how beneficial starting and contributing to an individual retirement fund is.
Let’s first begin by debunking a few retirement myths:
- A pension plan isn’t just for “old” people. It’s something we all need to think about, even before entering the workforce. This needs to be taught in school.
- Retirement isn’t always voluntary. Involuntary retirement may be induced by certain disabilities or illnesses, which renders one unemployable.
- Contrary to what may be popular belief, it isn’t difficult to begin contributing to a retirement fund, whether self-employed, unemployed, or employed without a company pension plan. In fact, it’s much easier than taking out a loan – which my assumption is what people will be trying to do in their retirement when they have no retirement funds to survive on. *adjusts spectacles*
How do I start a retirement fund and what are the requirements?
You can start a retirement fund with almost any of the major financial institutions nationwide. Start by simply identifying which one you think will be compatible with your needs, current situation and long-term goals. My advice is to not just simply pick one. Employ due diligence and find out what each institution’s average ROI (return on investment) is annually, what securities your funds will be invested in, etc.
The requirements vary across institutions for individual who wish to start their retirement funds but for the most part, they are pretty simple. Yes, there are ACTUALLY a few institutions who don’t want your fingerprints, dental records, DNA sample and the name of the tribe in Africa your ancestors originated from. Unbelievable, right? OK, perhaps I’m exaggerating a little bit, but you get the point, right? Mmkay.
Please note the following:
- You must be 18 years of age and older to start and maintain an IRA (Individual Retirement Account).
- You are only allowed to contribute to one(1) retirement fund, at any given time.
- You must be a Jamaican resident to start an IRA in Jamaica. This means that you must reside in Jamaica for at least 6 months out of each calendar year.
The Mandatory Requirements (these are standard across all institutions):
- Proof of Identification – A National ID, Driver’s License or Passport will do. Some institutions require a combination of two(2).
- Proof of Address – A Utility Bill, Credit Card Bill, etc. not older than 3 months old should suffice (preferably in your name).
- TRN – Tax Registration Number
- Cold, hard cash – Well, of course you’re going to need some money to start! There’s only so much you can pay for with good intentions and pocket lint. Now, depending on the institution, the initial amount you need to get started ranges anywhere from $1000 JMD, all the way up to… *has a mild stroke*
- Monthly Contribution – You didn’t think you could just start an IRA and then leave it be, right? You can’t. The minimum required contribution to your retirement is 5% of your gross salary and a maximum of 20%. Depending on your employment status and income, some institutions will allow you to pay a fixed amount monthly (usually the same amount you started the fund with). Remember, due diligence.
The not-so Mandatory Requirements (these vary across institutions):
- Proof of Income – If you are employed, a payslip or job letter from your employer is required. If you are self-employed, a bank statement is required. If you are unemployed, a little bit of lying by omission is required… I kid. *chokes on laughter* What you will need to do is to state the source of your funds, both for your initial and monthly contributions.
- Character References – Some institutions don’t require these, some institutions want written references, and others just want a name and contact number of someone to verify your credibility. Acceptable references vary across institutions. Again, due diligence.
By now, I hope you’re getting the gist that this really isn’t as difficult as you had maybe thought.
Why is it important for me to start a retirement fund NOW?
Sidenote: If you really asked this question, I’m going to assume you did Math with a purple crayon in high school. Now, let’s look at three obvious and not-so-obvious major benefits of early (or, for my more mature readers: as soon as possible) retirement planning. These, we’ll refer to as “TCIT.”
1. TimeLife’s biggest tragedy is that we get old too soon and wise too late. – Benjamin Franklin Click To Tweet
As most millennials nowadays are “turning up” and chanting “YOLO”, the thought of retirement is only but a distant, fleeting one. After all, you can worry about that later, right? Wrong! With this kind of thinking you might end up dead wrong, too. Get it? Dead… Wrong? I crack myself up! *slaps knee*
Anyways… *regains composure*
This one is very obvious and in this instance, time is money. The more time your money has to grow, the more it will grow. Also, a longer time span means that you and your funds are better able to ride out the bull and bear (high and low) periods of the market a lot smoother than someone with a shorter time before retirement.
2. Compound Interest
“Compound interest is the eighth wonder of the world. He, who understands it, earns it. He, who doesn’t pays it.” – Albert Einstein
According to Wikipedia, “Compound interest arises when interest is added to the deposit of a deposit or loan, so that, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.”
Interest, in general, is very black and white – you’re either earning or paying it, and Compound Interest can be your best friend or your absolute worst nightmare. In the diagrams and example following, we’ll explore just how powerful interest compounded with time can be… *takes out magic wand*
Assuming three subjects: A, B & C. Also assuming an agreed retirement age of 65, an average market return of 10% per annum and each subject contributing a fixed amount of JMD $2500 to their retirement fund monthly (this also being their initial contribution), how much will each subject retire with?
Subject A began contributing to her RF at age 25, Subject B at age 30 and Subject C at age 35. The three diagrams below, calculated using Money Chimp’s compound interest calculator, shows how much each subject will have upon retirement (not adjusted for inflation):
“Wooooooooow!” Yes, it’s almost unbelievable. The time value of Subjects B and C’s money decreased by $5,189,937.68 and $8,412,480.64 respectively, in comparison to Subject A’s by them waiting an additional 5 and 10 years to get started. This accounts for Subject B retiring with over 60% less in his retirement account and subject C with almost 170% less, when both are compared to Subject A.
In order for Subjects B and C to have retired with approximately the same amount as Subject A despite their late starts, they would both have to increase their monthly contributions to $4,095.83 and $6,761.80 respectively (additional amounts of over 60 and 160 percent). That’s pretty significant, if you ask me!
I hope these diagrams helped to drive home the point of how important time compounded with interest is to securing your financial future.
“Taxes grow without rain.” – Jewish Proverb
This word usually makes a lot of people shudder (myself included), but it actually turns out to be our best advantage in this case. Like I mentioned earlier, you contribute to your retirement fund with pre-tax dollars! This is referred to as an “income tax deduction“. That means that you are able to subtract an eligible expense (retirement fund contribution, for example) from your gross salary to reduce the income upon which taxes will be due.
Basically, you give the Government of Jamaica less, keep more working for yourself over time compound with interest while maintaining the same standard of living you enjoy now. If employed, this can only be done if your contribution is salary deducted. If self-employed, you are allowed to pay your retirement contribution from your gross earnings, before taking care of other expenses – like taxes. 100% legal and legit.
Let’s look at why it would be smart for you to contribute to your retirement fund from your gross income. We’ll use Subject A from earlier because the previous diagrams showed she is smart, and Subject C, because said diagrams showed he is stupi… slow. I meant to say slow.
So, assuming both subjects earn a gross monthly income of JMD $50,000, but Subject A contributes to her retirement fund with pre-tax dollars as opposed to Subject C who doesn’t; how much taxes will each subject be legally obligated to pay? The diagrams below has our answer:
Please note that while there are no significant differences in the net salary for both subjects, Subject A paid 17.01% less taxes than Subject C, because of her 20% IRA contribution from her gross income. And we all know how beautifully compounded that $10,000 will be over time, don’t we? Just use Money Chimp’s compound interest calculator if you need a reality check.
What are the disadvantages of contributing to a retirement fund?
Again, if you really asked this – purple crayon…
But, I will be honest. Two distinct disadvantages come to mind:
- You will no longer be able to indulge in instant gratification or trying to keep up with the “Joneses” (who are quite possibly broke) at the expense of your future and financial security.
- You might die before you retire (womp, womp!), which means you saved all that money and you’ll never be able to enjoy it. Oh well, I doubt dead people have regrets, and I’m sure your beneficiaries will gladly do away with all that money for you. If they’re not interested, I’m very open to the idea of honoring your memory and hard work with some new shoes. Just saying… *giggles*
What happens to my money after it goes into my retirement fund?
The good news is that it doesn’t just sit there. The money in your retirement fund will be invested by professional investors into different investment instruments to yield the best possible returns. This is referred to as your ROI (return on investment). The securities that your funds are invested in depend largely on your personal risk tolerance level which may be conservative, moderate or aggressive. These securities may include, but are not limited to: stocks, bonds, real estate, certificates of deposits(CDs) and treasury bills, both in the domestic and international markets.
In closing, let me share a final thought with you: If you don't begin planning for your future now, you're going to end up paying double for you… Click To Tweet