(Article for the Jakarta Globe – 24 September 2012 issue)
MONEY WISE
THE IMPORTANCE OF AN OVERALL PLAN FOR RETIREMENT
The last four articles explained why we cannot assume our respective
governments or employers will keep us whole in retirement. The burden of
supporting ageing populations can no longer be borne by dwindlingworkforces. We looked at a formula to calculate how much we should save forretirement, a good rule of thumb being to estimate how much a month wewould need in today’s money and then multiply it by 240. The resulting figureshould produce the desired income based on an assumption of a 5% annual
return. The daunting figure will still need to be adjusted regularly to takeaccount of inflation.
The conclusion was that we will almost certainly need to supplement
any pension we might expect from a government or employer. This could
entail a private pension plan and / or a portfolio of investments. But theycannot be relied upon too heavily as they depend on the vagaries of thefinancial markets and may produce far less than originally projected. So whereelse should we look?
Annuities
This is a very basic form of pension and it has the advantage of not being
subject to market fluctuations. While there are variations, a basic annuity will
guarantee a given level of income for life. It should not be affected by stock
market crashes or any form of economic or political disturbances. However,
because the amount is fixed its purchasing value will be eroded by inflation.
After 20 years its real value could be less than a quarter of its original value.
The other big drawback is that the annuity dies with you; there is no residual
value for your estate. At this point in time you will not get a very high return onan annuity due to the low yields on bonds. Nevertheless, it is always
comforting to have some fixed income coming in. It could also make sense forsomeone in poor health or a smoker since insurance companies will often pay
a higher amount if they think the person will not be around too long to collectit!

Property
A major financial planning objective should be to have a home that isfully paid for well before retirement. Many people will find that the family
home they have occupied for years is too large once the children have ‘flown
the nest’. This is an opportunity to trade down to a smaller house and release
equity which can be added to the retirement pot.
In addition to the family home some find that owning other properties is a
profitable investment as the rentals can boost income in retirement. Many
people in Indonesia have profited considerably from land they bought years
ago. If the price is right land should always be a good asset to own. As MarkTwain said: “Buy land; they are not making it anymore.” Be aware howeverthat real estate is not liquid; it can take a long time to sell when you may needcash in a hurry. Maintenance costs can also be a burden, particularly if aproperty is old.
Running a business or working in retirement
When you are young the concept of retirement is often one of putting yourfeet up and just taking life easy. This is not how many see retirement today.
Some see it as an opportunity to start a small business or to work in a fieldtotally different from their previous profession. There is probably no worse
retirement gift than a gold watch or a clock, the traditional way a company
would say ‘thank you’, implying that the retiree would spend most of his
remaining days watching time go by.
A job or business may help to ease the financial strain but it is also importantfrom a psychological point of view. The job does not need to be a paying one;it could be charity related or connected to a particular interest or hobby. I
always fancied driving steam engines. It’s a bit late for that now as a career but
there are opportunities to qualify and help out on railway lines restored as
tourist attractions. Or you can join a local chapter of the Hash House Harriersin Indonesia or elsewhere and grow old disgracefully! The important thing is tostay active as this can also result in lower medical bills.
It is never too early to planAs you will gather, planning for retirement is a bit more than just checking thatyou have a pension. The financial side definitely needs serious attention but sodoes the whole concept of retirement. And the time to plan is well before theday they give you that gold watch.
Colin Bloodworth is Director of PT. PPI Indonesia.
If you have any questions on this article or a related subject you can contact
the writer at indonesia@ppi-advisory.com

PPi Indonesia