Financial Literacy and Preparation are keys to Retirement Planning in Guyana

Jun 18, 2017 News

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Dr. Terence Smith, Deputy Governor, Bank of Guyana

Most older Guyanese, it appears, are not at all confident about the efficacy of their efforts to save for

retirement. In many conversations with these older citizens it was revealed that retirement planning is lacking and many households arrive close to retirement with little or no wealth.
In fact, what is apparent is that many households are unfamiliar with even the most basic economic concepts needed to make saving and investment decisions. Such financial illiteracy is widespread even more so in the rural communities of Guyana.
What is significant is that the research indicated that adults who have an account at a financial institution or a mobile money account are about 53%-64% more likely to save for old age than adults who lack an account.
In addition, there is evidence in favour of institutional arrangements enabling greater trust in the financial system, in terms of safety mechanisms such as consumer protection and deposit insurance being conducive to increasing rates of saving for old age. In the case of Guyana, the banking industry has adopted measures to handle consumer complaints.
The new insurance law includes consumer protection provisions, and the Credit Reporting Act, enhanced in January 2016 has relevant privacy provisions. Very early work is being done on developing a Deposit Insurance Scheme.
Ways to prepare and plan for retirement
Research has shown that retirees suffer from a variety of economic hardships, even in developed countries that enjoy relatively strong pensions systems. Retirement has an overall negative effect on life satisfaction, with larger effects for involuntary retirement, and insignificant effects for voluntary retirement. High levels of poverty among the elderly compound the negative economic consequences of a retirement crisis. For the Guyanese population it is no different and in some ways it is worse because of the lack of sophisticated social safety nets such as welfare, universal health care, and other subidzed services for retirees as seen in more advanced economies.
Financial security in retirement takes planning and commitment. So, it is crucial to identify your future sources of income and expenses and establish your retirement budget, based on your plan. In fact, retirement planning is essential, the earlier you begin the better prepared you will be.
1. Start saving and keep savings: If you are not saving, it’s time to get started. The power of compound interest will have much more time to work in your favour if you start investing as soon as you start making money. However, most people in their 20’s are way too busy to think about retirement. The literature recommends that a common rule to follow is that a retiree will need up to 80% of his/her annual income today to retire comfortably. So, start small and try to increase the amount you save each month. Pay yourself now, you’ll thank yourself later.

 

 

 

2. Budget for retirement: Create a monthly budget that shows all your current and expected monthly expenses. Vanguard Personal Investors recommends preparing a work sheet. Then, be prepared to adjust it as your retirement lifestyle develops over time.
3. Learn about your employer’s pension plan: If your employer has a traditional pension plan, check to see if you are covered by the plan and understand how it works. The employer contributions are vested to the plan member as soon as his or her membership begins. In the event of a member’s death, his or her spouse receive a pension or other benefit. Remember that the pension fund does not belong to the employer, it cannot be seized if the business goes bankrupt. Ask for an individual benefit statement to see what your benefit is worth. In addition, find out if you will be entitled to benefits from your spouse’s plan.
4. Don’t touch your retirement savings: If you withdraw your retirement savings early you’ll lose principal and interest or have to pay withdrawal penalties.
5. Find out about your National Insurance Scheme(NIS) benefits: According to the NIS, several rules come into play with respect to pension distributions. These rules are generally related to pension calculations. These include your “relevant wage” and the percentage factor.” Self-employed persons must ensure that 12.5% of their declared income is submitted to the NIS as contributions. You will be able to estimate your benefit by periodically checking with the scheme.
6. Avoid high debt: High debt including the misuse of loans make it tough to save for retirement. Money that goes to pay interest, late fees, and old bills is money that could earn money for retirement. Debt isn’t necessarily bad, but too much debt is.
7. Insure yourself: Insurance protects your financial assets, by helping to take care of the really big financial disasters when they occur. You should consider health, automobile, and life insurance coverage.
8. Women need to pay special attention to making the most of their money: Women faces challenges that often make it more difficult for them than men to adequately save for retirement. Women tend to earn less than men and work fewer years. Some studies indicate that on average, women live 5 years longer than men, and thus need to build a larger retirement nest egg for themselves. Also, women tend to lose more income than men following a divorce.
9. Self-employed persons in Guyana must build their own personal savings: Unfortunately, certain financial products are not readily available in Guyana. As a result, self-employed individuals have no tax-deferred options to choose. In the United States for example there are several options for the self-employed – Simplified Employee Plan (SEP), Keogh, Simple IRA and Annuites.
10.Preparation when there’s little time left: When retirement is just around the corner reduce expenses and funnel the savings into a nest egg. Take a second job or work extra hours; retire later, you may not need to work full time beyond your planned retirement age.

Financial literacy and retirement planning
Many Guyanese are poorly informed about basic economic and financial concepts, including the meaning of compound interest. Also, these individuals tend to be remarkable uninformed about their retirement benefits. To remedy this situation some employers have started financial and retirement seminars for their employees. With respect to retirement, the bank’s program will focus on basic financial literacy questions such as follows:
1. Numeracy – Suppose you had $100 in a savings and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
2. Compound Interest – Suppose you had $100 in a savings account and the interest rate in 20% per year and you never withdraw money or interest payments. After 5 years, how much would you have on this account in total?
3. Inflation – Imagine that the interest on your saving account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
4. Time Value of Money – Assume a friend inherits $10,000 today and his sibling inherits $10,000 3 years from now. Who is richer because of the inheritance?
5. Money Illusion – Suppose that in the year 2010, your income has doubled and prices of all goods have doubled too. In 2010, how much will you be able to buy with your income?

Conclusion
With retirement preparation and adequate financial literacy, more Guyanese will learn to understand the value, features and planning process, associated with saving and investing and able to apply this knowledge to long term security and wealth.

Next week we will discuss empowering teachers to help curb the gap in financial education. Thanks for all your comments and support. As usual, please send your comments or questions to [email protected]

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