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Retirement savings advice for Gen-Xers
o First published September 12, 2012.
A recent study reveals that eligibility to participate in an employer's retirement plan is the single most important factor in solving the retirement dilemma many young people now face. Of course, just being eligible to participate in a plan isn't enough - you actually have to participate and follow up this participation with several critical steps outlined below.
For younger workers today, retirement savings plans are found internationally to be the primary, and typically only, plan to save for retirement. This "do-it-yourself" saving system will most definitely spell the difference between being financially secure during retirement years and or struggling in old age. The sad but true reality is people in their old age are being forced back into the workplace and the golden age of retirement is quickly becoming a whole lot less golden due to poor planning.
The plan
As such, we thought it necessary to present a retirement action plan for people in their 20s and 30s.
Join your company's retirement plan as soon as you become eligible. Most companies will require you to be employed for six months to a year to join their retirement plan, but a growing number of businesses allow workers to participate immediately. So, the very first thing to do upon employment is to find out when you are eligible to join your company's retirement plan. After discovery enroll as soon as you can. Also find out how much you need to contribute in order to receive the maximum matching contributions from your employer (assuming one is offered). Most employers will require you to contribute at least six percent of your salary with a three percent employer match. Remember if your employer is willing to match your contributions it only makes sense to make as large a contribution as you can make (considering how much will be matched). If you put 10 percent of your salary into retirement contributions and your employer matches that 10 percent, you are now annually banking 20 percent of your salary (for doing the exact same work you had been doing previously). It is shocking to know the amount of people who do not take advantage of this.
If you are not eligible to participate in your company's retirement plan or they do not have one, you do have options. Self-employed persons and those not covered can create their own retirement plans at any financial institution that has dedicated retirement plans. It is important to appreciate here that an insurance policy and a retirement plan are not one and the same. If you fail to make a contribution with a retirement plan (though you should never plan to do this), the money is not lost nor is your access to your retirement plan; and the type you can get depends on your level of health. This is another consideration that most people seem to be unaware of (life insurance is however incredibly important and everyone should have it). Additionally, a savings account and a retirement plan are not one and the same. Savings accounts often offer very little interest because of the speed with which the money turns over. In comparison retirement plans are dedicating to increasing the amount of money that has been invested.
Thus, it is important to note that having access to a retirement plan is not necessarily something that must be provided through your employment. A person can have as many independent retirement plans as he wants.
Why it is necessary
Retirement planning is about planning for the level of financial comfort in retirement that you want. If you find that your current contributions will not allow for the standard of living you are presently accustomed to, maybe you need an additional retirement plan.
Contribute 10 percent. Most employer-sponsored retirement plans will provide a matching contribution on up to six percent of employee contributions. But this is not some implied message for what you should be contributing. Several studies have concluded that for the average worker, if you are working and saving for retirement over 30 years and all you have to draw on is your retirement and national insurance, you will need to contribute a total of 13 to 15 percent of your pay each and every year into your retirement plan account to have a reasonable chance of having enough money to fund your retirement (this in fact depends really on how long you intend to live post-retirement). So if your employer contributes three percent and you contribute 10 percent, the total contribution would be 13 percent.
Planning for the future versus surviving in the present is a very real problem many Bahamians face. Juggling debt payments and retirement savings can be a struggle. If you have student loans, don't sacrifice retirement savings to make extra principal payments on these loans. Instead, consolidate your loans into a single loan with a lower payment. This will free up cash-flow to contribute to your retirement plan.
But if you have credit card debt, the advice is different. Contribute an amount to your retirement plan to get the maximum employer's matching contributions (typically six percent) and then use any extra income to pay down your credit card balances as quickly as possible. That is because while the return on the "matched contributions" is hard to beat, the return on the unmatched contributions is not likely to exceed the 18 to 29 percent interest rate you could be charged on the credit card debt. If you lack the discipline to go back and increase your retirement contributions after you pay down your credit card debt, then it is best to simply start at 10 percent.
Escalate contributions. If you absolutely cannot afford to save 10 percent of your pay right now, then begin with at least the minimum required to receive the maximum employer matching contributions, and automatically increase your contributions each year to coincide with your annual pay hike.
Many retirement plans include an automated feature called a "contribution escalator", which you can set up to automatically increase your contributions by a defined amount on a pre-set date in the future.
Invest for maximum growth. According to studies on retirement plan service providers, younger employees invest more conservatively than their parents do, allocating some 35 percent of their retirement funds to lower-risk bond and stable value funds. Studies show that some 19 percent of workers in their 20s have no stock investments in their retirement plans. Clearly, the reason for this is the recent experience with stock funds during the recent financial crisis. But the younger you are, the more time you have to save and invest. As a result, most of your retirement account and future contributions should be allocated to stock funds, which over time should outperform lower-yielding bond funds.
Many people look at planning for the future as planning for some far off, gray or abstract place in 'time'. This, however, is the wrong approach.
Planning for the future is planning for tomorrow and tomorrow is 24 hours from today. Remember, it is absolutely necessary that we are proactive in our preparations for our financial well-being.
o CFAL is a sister company of The Nassau Guardian under the AF Holdings Ltd. umbrella. CFAL provides investment management, research, brokerage and pension services. For comments, please contact CFAL at: column@cfal.com.
Retirement Savings Advice For Gen-Xers
A recent study reveals that eligibility to participate in an employer's retirement plan is the single most important factor in solving the retirement dilemma many young people now face.
Ryan Pinder Contribution - Employees Pension Fund Protection Bill, 2012
Today I rise on behalf of the good and loyal constituents of Elizabeth who sent me here to work for all Bahamians, to give my contribution in support of the Employees Pension Fund Protection Bill, 2012. Consistent with our commitments in our Charter for Governance, we tabled for review and consultation within 100 days of coming to office this Employees Pension Fund Protection Bill, 2012.
Five steps to dumping debt
It's a rare person who can escape debt altogether. And the truth is, not all debt is bad.
Mortgage debt and student loans are often necessary parts of living and building your net worth. But other debt - namely escalating credit card balances - is just plain trouble.
We do not have statistics for The Bahamas, but a good guess would be in the order of $4,000 to 5,000 per person. With the average interest rate on credit card balances running around 17 percent, those balances rise far too quickly.
Tackling debt requires discipline, but it can be done. These five steps will put you on the road to a better financial life for 2012.
Stop the spending madness
The only debt you should have is the kind that helps you increase your net worth.
Most of us can't afford to pay cash for our homes, and as long as you don't borrow so much that you can't keep up with the payments, a mortgage will help you increase your assets as well as put a roof over your head.
Often, it also makes sense to borrow to buy a car or pay your own tuition bills.
Borrowing to finance your children's education is a bit trickier. It depends on whether keeping up with payments might jeopardize your own retirement savings. Students have a wide variety of sources to help them foot the bills, but there's not much you can do if you haven't squirreled away enough for your golden years.
As for credit cards, they should be used only for convenience. Never use them to buy something you can't afford otherwise. That means forgoing things like vacations and new clothing until you are able to make your monthly payments in full.
Make a budget
Before you can start paying bills successfully you need to figure out exactly how much money you have to put toward your debt. Financial planners suggest keeping your total debt to less than 36 percent of your income. It's a worthy goal, but to reach it you'll need to find out exactly where your money is going. Write down every single penny you spend for one month.
Make sure you include every check you write, every credit card purchase and every ATM withdrawal.
At the end of the month, group the expenses into such categories as food, entertainment and rent. You'll now see which expenses are fixed - that is, you have to pay them each month - such as your rent, transportation and utilities, and which are variable. The fastest way to save money is to cut spending on entertainment, food and clothing. If you are still unable to meet your bills, you'll have to take more drastic steps to reduce your fixed expenses or earn additional income.
Make a payment plan
If you carry a balance on your credit card, you'll end up paying far more for everything you buy thanks to those whopping interest rates. Don't fall into the trap of paying only the minimum on your credit cards.
On average, it takes about 20 years to pay off a balance by just sending in the minimum payments.
Instead, once you pay your fixed expenses each month, use any remaining money to pay off the balance with the highest interest rate first, while putting the minimum toward any other cards.
Once that balance is paid in full, do the same with the balance on the card that carries the second-highest rate. If you have more than one or two credit cards, cut them up as soon as you finish paying off the balance.
If you can't make payments on a car or student loan, try to negotiate with your lender. Many are willing to work out some kind of repayment plan - it's better for them to get some money back than nothing at all.
If you own a home, consider refinancing your mortgage. Refinancing often makes sense if you are paying a rate considerably higher than the current average rate (find current rates by calling Colina Financial Advisors Ltd.). By getting a lower interest rate, you may be able to lower your monthly payments and you'll surely pay less interest over the life of your loan.
Borrow carefully
If you've made a genuine effort to pay back your debts and are still under water, consider taking out a loan. If you're a homeowner, refinancing your mortgage is often the best option; but you may also take a loan against the equity you've built in your home. Home equity loans generally carry rates slightly higher than current mortgage rates, but far less than the average credit card rate.
But home equity loans are no magic bullet. They are still a form of debt - and you may be putting your house at risk. Make sure that you get a loan with a low interest rate and that you will be able to meet the monthly payments. Shop around for the best terms. Another option, but only as a last resort, is to borrow from your retirement fund. We really do not recommend this option. If at all possible please do not borrow from your retirement plan.
Some companies allow you to take a loan from your account, which generally must be repaid within a certain time frame. We hope pension legislation would address this issue.
Get help
If you're still stuck, consider getting outside help. Still unsure if you need help? Here are three common signs that a problem has gotten out of control: If you're unable to meet your monthly payments; if you're taking cash advances from one credit card to pay off another; or if you are using your credit card for necessities that you used to pay for with cash.
CFAL is a sister company of The Nassau Guardian under the AF Holdings Ltd. umbrella. CFAL provides investment management, research, brokerage and pension services. For comments, please contact CFAL at: column@cfal.com.
Five steps to dumping deb
First published on
January 4, 2012
It's a rare person who can escape debt altogether. And the truth is, not all debt is bad.
Mortgage debt and student loans are often necessary parts of living and building your net worth. But other debt - namely escalating credit card balances - is just plain trouble.
We do not have statistics for The Bahamas, but a good guess would be in the order of $4,000 to 5,000 per person. With the average interest rate on credit card balances running around 17 percent, those balances rise far too quickly.
Tackling debt requires discipline, but it can be done. These five steps will put you on the road to a better financial life for 2012.
Stop the spending madness
The only debt you should have is the kind that helps you increase your net worth.
Most of us can't afford to pay cash for our homes, and as long as you don't borrow so much that you can't keep up with the payments, a mortgage will help you increase your assets as well as put a roof over your head.
Often, it also makes sense to borrow to buy a car or pay your own tuition bills.
Borrowing to finance your children's education is a bit trickier. It depends on whether keeping up with payments might jeopardize your own retirement savings. Students have a wide variety of sources to help them foot the bills, but there's not much you can do if you haven't squirreled away enough for your golden years.
As for credit cards, they should be used only for convenience. Never use them to buy something you can't afford otherwise. That means forgoing things like vacations and new clothing until you are able to make your monthly payments in full.
Make a budget
Before you can start paying bills successfully you need to figure out exactly how much money you have to put toward your debt. Financial planners suggest keeping your total debt to less than 36 percent of your income. It's a worthy goal, but to reach it you'll need to find out exactly where your money is going. Write down every single penny you spend for one month.
Make sure you include every check you write, every credit card purchase and every ATM withdrawal.
At the end of the month, group the expenses into such categories as food, entertainment and rent. You'll now see which expenses are fixed - that is, you have to pay them each month - such as your rent, transportation and utilities, and which are variable. The fastest way to save money is to cut spending on entertainment, food and clothing. If you are still unable to meet your bills, you'll have to take more drastic steps to reduce your fixed expenses or earn additional income.
Make a payment plan
If you carry a balance on your credit card, you'll end up paying far more for everything you buy thanks to those whopping interest rates. Don't fall into the trap of paying only the minimum on your credit cards.
On average, it takes about 20 years to pay off a balance by just sending in the minimum payments.
Instead, once you pay your fixed expenses each month, use any remaining money to pay off the balance with the highest interest rate first, while putting the minimum toward any other cards.
Once that balance is paid in full, do the same with the balance on the card that carries the second highest rate. If you have more than one or two credit cards, cut them up as soon as you finish paying off the balance.
If you can't make payments on a car or student loan, try to negotiate with your lender. Many are willing to work out some kind of repayment plan - it's better for them to get some money back than nothing at all.
If you own a home, consider refinancing your mortgage. Refinancing often makes sense if you are paying a rate considerably higher than the current average rate (find current rates by calling Colina Financial Advisors Ltd.). By getting a lower interest rate, you may be able to lower your monthly payments and you'll surely pay less interest over the life of your loan.
Borrow carefully
If you've made a genuine effort to pay back your debts and are still under water, consider taking out a loan. If you're a homeowner, refinancing your mortgage is often the best option; but you may also take a loan against the equity you've built in your home. Home equity loans generally carry rates slightly higher than current mortgage rates, but far less than the average credit card rate.
But home equity loans are no magic bullet. They are still a form of debt - and you may be putting your house at risk. Make sure that you get a loan with a low interest rate and that you will be able to meet the monthly payments. Shop around for the best terms. Another option, but only as a last resort, is to borrow from your retirement fund. We really do not recommend this option. If at all possible please do not borrow from your retirement plan.
Some companies allow you to take a loan from your account, which generally must be repaid within a certain time frame. We hope pension legislation would address this issue.
Get help
If you're still stuck, consider getting outside help. Still unsure if you need help? Here are three common signs that a problem has gotten out of control: If you're unable to meet your monthly payments; if you're taking cash advances from one credit card to pay off another; or if you are using your credit card for necessities that you used to pay for with cash.
o CFAL is a sister company of The Nassau Guardian under the AF Holdings Ltd. umbrella. CFAL provides investment management, research, brokerage and pension services. For comments, please contact CFAL at: column@cfal.com.
Reckless advice
Dear Editor,
I believe that MICAL MP V. Alfred Gray was being reckless and irresponsible when he advised BTC workers not to accept any severance packages from Cable and Wireless executives, during his contribution to the 2011/2012 budget debate in the House of Assembly.
The workers must make that decision on their own. That is not a decision Mr Gray should be making for BTC staff. His advice could very well ruin a lot of BTC workers, if they were to listen to him, of course.
I was at a BTC substation in Freeport the other day and one of the technicians told me how excited he was to be receiving his retirement package from CWC. He will be getting close to 80,000 in one payment, plus he will be receiving close to 50,000 a year for the rest of his life. He is only 47.
What makes his deal so sweet is the fact that he did not even contribute one farthing towards his retirement savings. The government paid the entire sum. This worker will be earning more in his retirement than on the job at BTC.
He told me that it was a good thing that the FNM government sold BTC to CWC. He said that BTC was too far behind in technology, and that too many workers at the corporation were set in their old ways. He said that there was too much slackness at BTC; and that he was fed up with people being hired to work at the corporation because of their political affiliations. The corporation needed the change.
The BTC worker also told me that he wants to leave BTC and that he isn't tuning in to the PLP. He, like many other BTC workers, was very much in favor of BTC being sold to a private entity. He told me that he was thrilled that PM Ingraham had the courage to finally seal the deal on BTC.
What makes this BTC worker's story so fascinating is the fact that he is a loyal supporter of the PLP. He does not support the FNM. Yet, he was very much opposed to the PLP during the BTC/CWC sale debate earlier this year.
I thought that all the workers at BTC were against the sale of the corporation to CWC. The way the unions and the PLP were carrying on, you would think that everyone was against the sale. But this was not true. The BTC worker told me that many of the workers at BTC in Freeport were glad that the corporation was finally sold.
He admitted, though, that at first they were a bit apprehensive about CWC. But after CWC executives came in and explained their goals and objectives for the corporation, they became convinced that the FNM government had made the right decision to sell BTC.
The fact that Mr Gray could stand up in Parliament and give such a reckless recommendation to BTC workers only confirms what I have suspected all along: That the PLP party has no relevant message for the 21st century Bahamas. The PLP only seems to be interested in getting power. They have even threatened to reverse the BTC/CWC deal if elected to government in 2012. But this move would be a major mistake. The PLP wants to use this issue as one of their major campaign messages.
While it is true that CWC has had its share of problems throughout the Caribbean, the managers and executives have stated repeatedly that they have gotten their act together.
The BTC/CWC deal was a good move by the FNM government. Besides, governments aren't supposed to be in the telephone business anyway. I believe that the telephone business should be reserved for the private sector.
The BTC worker told me that he believes that BTC will now move into the 2st century. With the kind of sweetheart deals CWC is offering BTC workers, they would be crazy to listen to V. Alfred Gray and the PLP.
Yours, etc.,
KEVIN EVANS
This Christmas Give the Gift of Savings
This Christmas
Give the Gift of Savings at Family Guardian
Toys break and fashion fades, but
a mutual fund certificate can be the gift of a lifetime!
Give the special people in your life the gift of opportunity - for
education, travel, a worry-free retirement. Set them on the path to
savings and wise investing to secure their future.
This Christmas Give the Gift of Savings
This Christmas
Give the Gift of Savings at Family Guardian
Toys break and fashion fades, but
a mutual fund certificate can be the gift of a lifetime!
Give the special people in your life the gift of opportunity - for
education, travel, a worry-free retirement. Set them on the path to
savings and wise investing to secure their future.
This Christmas Give the Gift of Savings
This Christmas
Give the Gift of Savings at Family Guardian
Toys break and fashion fades, but
a mutual fund certificate can be the gift of a lifetime!
Give the special people in your life the gift of opportunity - for
education, travel, a worry-free retirement. Set them on the path to
savings and wise investing to secure their future.
Reduction of the prime rate
Two weeks ago the Central Bank of The Bahamas announced that it was reducing its Discount Rate to 4 1/2 per cent or, by ¾ of percent.
The Discount Rate is the rate of interest that the Central Bank charges the commercial banks which borrow from the Central Bank from time to time, usually over short periods.
The discount rate is essentially an "indicative rate", in that it indicates to the banking system exactly in what direction the monetary authority would wish interest rates to go. Accordingly, 24 hours later, the Clearing Banks Association announced that all commercial banks would lower their Prime Rate, which is the rate of interest that the banks charge to their best customers.
That policy move by the Central Bank was welcomed by many, but not all.
Some argued that it was somewhat late in coming. But every little bit helps in an ailing economy where bank loans in arrears have exceeded one billion dollars, representing almost 20 percent of all outstanding loans in the local banking system.
Others were more skeptical, arguing the interest rate reduction would have little impact on the economy in terms of job creation and would serve only to punish the savers (retirement savers, depositors, long-term policyholders, beneficiaries of national insurance etc.).
The negative fallout on these savers should not be underestimated.
In The Bahamas a change in prime not only impacts the new money rate but the interest on previously purchased assets. Thus, the change will be to the detriment of the longer term savers and investors in the Bahamian economy, while at the same time rewarding those borrowers, many of whom overextended themselves and are having difficulties servicing existing loans.
There was also an argument that the interest rate reduction would increase the local money supply and ultimately lead to inflation.
It may be useful to briefly examine some of those arguments in an attempt to have some appreciation for this recent monetary policy stance by the Central Bank.
To begin with, the conduct of monetary policy in a small, open economy such as The Bahamas has, by necessity, its own peculiarities.
Interest rates are not determined by the interplay of demand and supply for money in the local financial market; those rates are set outside of the market (externally) by the Central Bank itself after analyzing local economic conditions.
Reducing the interest rate therefore does not involve increasing the money supply by buying more government bonds, as is the case in the US; it only takes a policy announcement by the Central Bank.
Indeed, with less interest being paid to depositors, the money supply should actually grow at a slower pace.
As regards the impact on borrowers and savers, good public policy demands that at the end of the day, any policy change should have a net positive impact on the entire community.
Simply put, in our financial system today the total amount of outstanding loans is in the region of $8 billion and the total amount of deposits and longer term savings is in the region of $8 billion. The owners of those deposits and loans are not separate groups of people; they are the same people, the rich, the poor and the in-between.
By reducing the interest rate the net borrowers will benefit, but the net impact on the entire community is yet to be determined.
Lastly and perhaps most importantly, it is neither the statutory role nor the policy intent of central banks in small developing countries to produce jobs; that is a function of the private sector and an obligation of the state to provide a conducive environment for job creation.
In the context of The Bahamas, the country is experiencing the worst recession in modern history. Unemployment is high and people are losing their homes.
The country's external reserves are at historically high levels, which give the monetary authority sufficient headroom to reduce the cost of borrowing without compromising the one-to-one exchange rate relationship between the Bahamian and US dollars.
It remains to be seen whether the rate reduction, on balance, was a good move by the Central Bank.
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