There is life insurance that pays whilst you are living

Retirement is a certainty. At some stage in our life we will need to retire because we are no longer able to work as we used to do. In most cases, we retire to our rural homes to find love and care from family and friends. Also in most cases, the standard of our lifestyle drops drastically because we have not been able to set aside something for our retirement.

The purpose of setting aside

• Retirement finance planning is the process of setting aside a percentage of one’s earnings on a monthly, quarterly or even yearly basis. The money is invested in a fund that can buy one a pension on retirement

Meet a male factory worker

• To demonstrate the concept of retirement planning let us take the example of a male who is a 55 year old. He is a factory worker and earns $800 per month.
• The law allows normal retirement age for any fund to be set at a common age between 55 and 75 years. Once the retirement age for the fund has been set, retiring earlier (but not before age 55 unless on grounds of ill health) would be early retirement and later than the normal retirement would be late retirement. At age 55, the factory worker can consider retirement.

On retirement, if the factory worker has put enough in his retirement (savings) kit, he will receive a pension that will adequately look after him for the remainder of his life. If however his retirement kit is empty, he has no choice other than to rely on friends and family for his survival – a very difficult life adjustment to make at any age. We can avoid this sort of soul-destroying destitution simply by planning for retirement.

The factory worker puts aside a certain amount of his monthly earnings while his employer sets aside an equivalent amount (or more) towards his retirement. These savings are then invested in a pension fund that will buy him a pension on his retirement. The earlier he starts saving for his retirement, the bigger his retirement kit will on retirement. Such employer assisted pension schemes are normally run by life insurance companies. Similar schemes, such as the Mining Industry Pension Fund and The National Railway Pension Fund, are self-administered.

Purchase a Retirement annuity

• Buying a retirement annuity from a Life Insurance Company will guarantee the factory worker a pension on retirement. He simply sets aside a percentage of his earnings every month, quarter or year, for a buying a stream of retirement income. He cannot withdraw cash from the retirement annuity until he gets to the retirement age.
• Some life offices also allow lump sum deposits in a retirement annuity. To illustrate this, we look at several of the factory worker’s friends, who grow tobacco and earn large sums of money at the end of each season. Such farmers are encouraged to put a percentage of their earnings (lump sum) and buy a retirement annuity for their retirement
• Now the factory worker has friends who are in their 40s with nothing in their retirement kits, because every time they joined a new company the cashed in their retirement savings from the previous employer. He was a bit cleverer, because when he moved jobs he also moved his retirement savings to the new employer’s pension scheme, thereby keeping the savings intact (He is, of course, aware that harvesting pension savings can attract heavy punitive taxes.)

Lastly the factory worker could consider investing the little that remains from his salary. He could consider investing in the stock exchange, property, bonds and even going into business. However he is just a factory worker and he realises that he cannot expertly make investment decisions. He does not understand the stock market let alone invest in it.

The factory workers owns a three bedroom house that is still under construction, but it would be asking too much from him to invest in property. He understands his limitations. Running a business is not one of his strengths. He therefore cannot consider running a business as a substitute for retirement planning.

He has also consulted a financial advisor (agent). Given his current retirement savings, says his advisor, he is likely to get a total monthly income of only $150 from the three possible sources of retirement income.

This implies that when he retires in August, his monthly income, the following month, will plummet from $800 to $150. Even though he has been saving for retirement – his efforts might still fall far short of an ideal situation