Last week’s article on whether one should consider a fixed annuity as a retirement plan elicited quite a response, with one of the readers asking for further clarity on whether he should consider an annuity or instead invest in property for their retirement.
Every time I have training for members of pension schemes preceding their retirement (pre-retirement training), this question often arises. Surprisingly, as we continue with the training, the need for financial security in life after active work (retirement) becomes more evident.
By the time the training ends, you will realize that the retirees themselves have answered the question of what is better for them as they leave active service, but then the question is, what is the most effective way to plan for retirement so as to optimize the retirement income?
Effective retirement planning should be a journey, not an event. This should begin from the very day a person is employed or has a steady stream of income. From this point, one can paint a picture of what their retirement life should look like. I have made jokes about this in my training to retiring members of pension schemes by asking them to draw a picture of their youthful, active days and juxtapose the image with their current state. This has often elicited discussions on what is best to consider for retirement: a monthly pension, commonly referred to as an annuity, or a property investment.
There have been varied views on whether one should consider taking home a lump sum pension payment, as is the case for schemes that are Provident in nature, or better convert the pension to a monthly income (annuity). I like drawing cases from my village, where most of the senior citizens are ex-employees of companies that either used to have gratuity arrangements, had no pension schemes or had provident schemes, and retirees would resort to commuting the entire benefits as cash lump sum.
Most of them purchased land, while some purchased motor vehicles using their retirement benefits. While the investments helped them sustain their lifestyle, it was short-lived. The maintenance of machinery and failure to develop land later led them to sell the property for cash.
The need for cash in retirement is crucial, as most studies have shown. Studies in the pension industry have gone ahead to list some of the very critical areas that are pressing, hence making it almost mandatory to have pension arrangements in place for a comfortable life in retirement. I will explore a few of those here;
Medical Needs
One of the lessons we have all learned is that at the end of our service, our bodies, just like machinery, wear and tear, and therefore need continued repair and maintenance.
With age, our bodies are exposed to many factors that make them susceptible to illnesses, and since medical expenses have spiralled in our country, it makes it necessary to have ready cash to cater for medical expenses, buy drugs, attend clinics and so forth. Therefore, this underscores the need for liquidity.
Food Expenses
One must emphasize the fact that food is a costly affair. Moreso where senior citizens are guided on diet-specific foods, most of which are costly.
This basic and very important need will undoubtedly require ready cash for purchase.
School Fees and Expenses
The modern-day man and woman first have to chase careers and later settle on matters of family/marriage. There is a different school of thought to this, but for today, let us look at the former.
With “late” family arrangements/marriage, one often ends up retiring having school going children, and there kicks in school fees expenses. We all know how expensive education has become, and the need to expose one’s children to better education.
Miscellaneous Expenses
We all live in a society where one man’s problems is a society problem, and we have to be there for one another, either during good times like weddings, graduations etc, or bad times like funerals and hospital bills.
It is a norm that when one retires from work, all they need is social capital, to “live well with other people”. As such, one will need cash to sustain this.
From the above, you can tell the place of a regular income and its importance. An annuity, with its salient features of predictability and regularity, one can easily plan their finances, as they are certain of the amount they receive, giving them ability to meet their cash needs.
This is not to say that investment is entirely a bad venture in retirement. One needs to evaluate their liquidity needs and strike a balance.
Investment experts have advised that as one advances in age, or nears retirement, they should try as much as possible to move their investments in easy to liquidate assets, as opposed to assets that are take time to liquidate.
Remember, cash is king and life in retirement has its dynamics. The choice is yours, and I hope you make a good one for yourself.
Article By Fredrick Wabala.
First Published on Business Daily.
