We have all seen the nice “Before” and “After” photos of various transformations, whether of a home renovation, a hair and fashion makeover, a new garden, or anything else that improved with time and a little effort. While possibly not as exciting, saving for retirement also creates good things with time and effort: investing over the years before retirement leads to benefits to enjoy after retirement. But what do the “Before” and “After” pictures of retirement look like in Barbados? Do they show the kind of transformation and progress we would hope for and expect?
It’s probably worth remembering that the concept of “retirement” as we know it really only got going fairly recently. Prior to the second half of the 20th century, people largely assumed that you would work until you passed away, and that family members (kids!) would look after you if you could no longer work. The idea that government and companies could, and should, help people save for retirement and then provide them an income, came later. And because it came later, not surprisingly, it is still something of a work in progress. There is ongoing debate in countries around the world about the best way to fund a public (i.e. government) pension plan; tax policies for encouraging and facilitating retirement savings are evolving; and new investment products are gradually being developed that help people plan and save for retirement better.
In Barbados, the “Before” picture would capture the ways we save for the future: our tax-advantaged company pension contributions, NIS contributions, RRSP investments and other investments made with after tax dollars like mutual funds and real estate. As the financial experts tell us over and over again, diversification is essential – no one wants to keep all their eggs in one basket. So a good mix of savings and investments is a good idea, especially as we attempt to outrun the effects of inflation over time.
At retirement – or at retirement age – a transformation occurs that creates a new picture for us. We stop contributing to NIS, and NIS begins paying us instead. This is a happy moment. Traditionally, accumulated pension and RRSP assets are liquidated in order to fund the purchase an annuity from an insurance company. Just like NIS, the annuity pays a fixed amount each month, for life. The annuity gives us the certainty of a fixed cash flow, but it typically does this at a low underlying interest rate, and with the risk of being hugely exposed to only one insurer for the rest of our life.
A new complement, or alternative, to the traditional annuity is an “Income Drawdown” policy, to be offered soon to Barbadian investors. Just like a Retirement Income Fund (RIF) in Canada and elsewhere, this new option allows you to leave your pension invested after retirement, maintaining control and diversification of your funds, and taking a portion of the pension each month as an income.
Here is how the “Before” and “After” pictures could look now:
When planning for retirement, the “After” picture deserves at least as much attention as the “Before” picture. None of us would start driving a car until we had figured out where the steering wheel and brakes were, because we know we will need them eventually. We know that diversification and flexibility matter before, and it follows that they do after as well. Improvements and innovations in the marketplace may will help with this, but there is no substitute for planning ahead to get the best “After” picture possible.