(Article for the Jakarta Globe – 17 September 2012 issue)
MONEY WISEBUILDING A SOLID FOUNDATION FOR RETIREMENT
The last three articles on this subject reviewed the advances being madein some developing countries to provide for people who previously had to rely
on family support in retirement but also highlighted the growing pensions crisisin the west where citizens of countries who had enjoyed generous benefits inthe past were now seeing them being rapidly eroded.
People whose parents had enjoyed several decades of state pensions
adequate to cover basic necessities were now faced with having to work longer
for less due to ageing populations. And those who worked for large companies
were finding they could no longer count on a pension linked to final salary but
had to share the same risks that private investors took in the financial markets.
Self-help is the only sure solution
There is no point in demonstrating in the streets against loss of benefits
as they do in Europe and no use in going on strike against employers. It is a factof life that governments, or should we say taxpayers, cannot afford to allocate
huge resources to support growing numbers of retirees. And cash-strappedcompanies can no longer afford to fund pension schemes that were designed
in times when people had shorter lives and before financial markets became sounstable. The bottom line is that people must take responsibility for ensuring
they have made adequate provision for retirement.
Calculating needs in retirement
Before even looking at ways to build up wealth some homework isnecessary to calculate how much is likely to be needed to reach a target
income. A big unknown factor is future inflation so it is best to work on today’s
figures and periodically make adjustments. The first question is how much
would you need to live comfortably if you were retiring today? Let’s say thefigure you arrive at is US$2,000 a month. To generate such an income would
require a capital sum of $480,000 if we assume this can generate an income of5% per annum. The rate of return is still an assumption and the figures relate

to today’s money so will need to be adjusted upwards each year until
retirement. Having arrived at a target figure where do we start?
First build a foundation on cash
As I have said many times it is vitally important to build a solid cash
foundation, ideally across several banks and accounts, before contemplating
long term investing. Plunging into the stock market, a long term savings plan, aproperty investment or private business without ample cash reserves is thesurest way to disaster if you have to liquidate any of these in a hurry. Cash may
a poor long term investment but it will keep the wolf from the door and allow
you to make longer term investments in safety. How much cash reserves
should you hold? No two persons’ situations are the same but a good rule ofthumb is to have enough cash in the bank to meet all your needs for at least
two years. If it is impossible to build up cash reserves then it is best to face thereality that you may have to forgo other wealth-building opportunities.
Investing in the financial markets
Assuming you can meet the cash reserve target the next thing is to build
up savings in the financial markets which means accessing stocks, bonds,
commodities and perhaps more exotic instruments. Provided you can meet thecommitment and have enough time till retirement (at least 10 years) then aregular savings plan is a disciplined way to build up wealth. Get best advice onfund selection however as this can make a big difference.
If you are fortunate enough to have a significant amount of disposable
cash (say $100,000) then a portfolio of diverse assets will give you access tofunds not normally accessible within savings plans. The portfolio should growover the years and ultimately provide you with an income in retirement. If you
then draw down just 5% per annum you should also be able to preserve thecapital. The 5% would become part of your regular income in retirement.
If you can afford it then more than one savings plan is desirable and a
portfolio can also be supplemented by ad hoc lump sum investments fromtime to time, with each top-up enabling you to access a new asset or fund.
But so far we are still relying on conventional market-sensitive
investments so we need to consider wider opportunities. Next time we willlook at annuities, structured products, real assets including gold, collectibles
and, not to be overlooked, real estate.
Planning and action today can have a big impact on lifestyle in lateryears.
Colin Bloodworth

PPi Indonesia