How to build a retirement nest egg

Tuesday, Aug 23, 2011 The Brunei Times/ANN How to build a retirement nest egg WITH people living longer nowadays, it's more crucial now to start planning early for a comfortable retirement. Lim Kok Shien, a financial management lecturer at the Universiti Brunei Darussalam's Faculty of Business, Economics and Policy Studies, says it's important to start early to shore up one's retirement funds as the nearer one is to retirement, there's a slimmer chance to make a difference. TWO STEP In a recent lecture about the the Employees Trust Fund or TAP and the Supplemental Contributory Pension or SCP, he says there are two phases we all go through when it comes to building a retirement fund or nest egg: the accumulation phase, which starts on the day employment begins until the age of 60, and the spending phase, beginning at age 60 up to a life expectancy of 80 years old. "One has to be careful because upon getting a lump sum when retirement hits, if you get $100,000, you will feel like you have a lot and be tempted to buy a car or go on holidays and so on. That will finish your money," Lim warns. "There's no more income coming in and you have to spend the rest of your life with that. Even $200,000 might not be enough." He cites statistics from Singapore, showing those who plan early will get about $180,000 to $200,000 upon retirement as compared to $80,000 for those who didn't plan. "It also assumed that the amount needed a month during the spend phase is about 60 to 75 per cent of your post-retirement monthly salary, so we have to save right now," Lim says. NO SECOND CHANCE Upon hitting 60, there will be no second chances as income from paying job stops, he says. "If you realised you made a mistake, by then it's too late. If you are just 30 or 40 years old, or as long as you have an income, you can still (have) a chance. The closer to retirement, the smaller chance you have (to change)," says Lim. He says people should save more and grow their savings whilst they are still young and in the accumulation phase. "While you're still working, you can add more to your monthly TAP contributions, so that you will get more upon retiring as TAP currently allows you to contribute more. If you are still in the accumulation phase, you have the luxury of playing around with your monthly contributions, but once you hit the spending phase, the only way is to change your spending lifestyle," he says. Lim says 70 per cent of the country's workforce has an income of $1,500 and below. "If everyone plans properly, there will be lesser people who are poor or in debt. So don't give yourself an optimistic scenario when planning, you should be looking at a worse case scenario," he says. GO BEYOND TAP Lim says although retirees have SCP and TAP, just depending on them is not be enough. "Don't rely on those two contributions only. One has to think of other ways of investment because we should be contributing 30 per cent of our salary to savings. So Bruneians need to contribute at least 15 per cent of their own monthly salary to other forms of savings or investments," he says. Upon getting their retirement money, people may want to look into investing in something which is capital secured. "Obviously, the risk is small which will translate to lower returns. But when you have no more income, it's better to be safe and such an investment will help you cover inflation rather than just having it sit there," he says. "You might need to invest just to cover inflation, not only to make money, setting up a goal to save will give your life a direction. You will be more clear as to which way you want to go and what you shouldn't be spending on. It adds a priority setting to your life," Lim says. BEWARE OF SCAMS He says an investment product with a 10 per cent per year return is "very very good." "If you get a return of three per cent monthly, it's definitely fake because that's a 36 per cent yearly return which will be unlikely. If you think about what the banks are charging on credit cards, it's two per cent a month and 24 per cent a year compounding, which is already a lot," he says. He adds: "If it's too good to be true, it most likely isn't. Or if you didn't do anything, don't expect to win or get something." Retirees should be careful not to invest their retirement funds in scams because it means losing their hard-earned money, adding they should be particularly careful about offers from foreign companies. To ensure that foreign companies are real, check with the embassies concerned, he says. "As we work hard to make money, we deserve to spend it too. But spend it wisely and don't put all your eggs in one basket," he says. One obvious way for Bruneians to spend their money the wrong way is by buying cars. "The moment a car gets out of the showroom its value drops by 20 per cent. It's a liability to buy something so expensive to get people's attention for three or four months. Think about how many years you have to suffer for a few months attention," he says. Not only do people who buy cars pay the price of a six to seven year loan, they also missed out on the opportunity to grow or invest their money.