The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Too many Bahamians face having “to make sacrifices” because they wait too long to build-up sufficient savings to finance their retirement, a local banker warned yesterday.

Cleora Farquharson, RF Bank & Trust’s vice-president of pension services, told a webinar organised by the investment bank that retirement savings are not a priority for many of her clients until they start to age.

Calling for a cultural shift that would see Bahamians planning for retirement “sooner than later”, she added that too many were missing out on the benefits from “compounding” if they set aside small monthly savings much earlier in their working lives.

As a result, too many lacked the pension savings to sustain the lifestyles they presently enjoy in retirement, making for lower living standards and increased dependency on both the state and family members that acts as a wider drag on Bahamian society.

“Unfortunately, what I find happens with a lot of our clients is that retirement is not a priority,” Ms Farquharson said. “In The Bahamas, unlike Cayman, pensions are not mandatory. So it’s not on the top of the financial goals.

“Unfortunately, what I find happening for a lot of clients is that they wait until they get older and then start thinking about retirement. The unfortunate idea about that that is the longer you take to start, the less time you have to accumulate the funds that you need.

“So I encourage all my clients, the employers and the employees, to start saving sooner than later, make sacrifices and increase your contributions on a monthly basis.”

To prove her point, Ms Farquharson produced a chart showing how big a retirement nest egg could be generated by saving just $100 per month from the age of 20. Using a conservative 6 percent rate of return on this investment, by the time such a person hit the typical retirement age of 65 this would have grown to nearly $200,000.

Higher rates of investment returns, 8 percent and 10 percent, would deliver retirement savings of $349,120 and $632,468, respectively. “I have a lot of clients telling me where they will get $1m-plus [in retirement savings] on a $72,000 annual salary. It’s the power of compounding,” Ms Farquharson explained of the savings build-up.

However, by contrast, she said a person who started saving $100 per month at the age of 40 would achieve retirement savings of under $70,000 - based on the 6 percent conservative rate of return - by the time they reached 65 years-old.

Ms Farquharson said this highlighted the benefits of saving and planning early for retirement, as the sum realised paled in comparison to the $200,000 gained by the person who started saving at 20 years-old.

Similar results were obtained for the 8 percent and 10 percent investment returns rates, with the person who started saving at 40 years-old earning just $96,000 and $132,686 respectively, as compared to the $349,120 and $632,468 had they started saving two decades earlier.

“I don’t want clients to become discouraged,” Ms Farquharson said. “It’s better to save something rather than saying: ‘Oh, it’s too late. I might as well not start’. If you are starting later what I would encourage you to do is save $200, $300 a month to catch up. It requires smart planning and strategic investment, and the key is to start today, sooner rather than later.”

Illustrating the scale of the savings that Bahamians need to build-up to sustain their working life lifestyles in retirement, the RF Bank & Trust executive said someone earning $2,000 per month or $24,000 per year will need to develop a $480,000 nest egg to maintain their present living standards for 20-30 years after they reach 65 years-old.

For persons earning $4,000 per month, or $48,000 a year, Ms Farquharson identified the savings target as $960,000. And for higher earners on $6,000 per month, or $72,000 per year, the goal is $1.44m.

“Many of my clients can tell me when they’re going to stop working, but very few of my clients can tell me exactly how much funding they’re going to need in retirement,” she added. “This is a very important question that needs to be answered.”

While working and contributing to a pension plan, Ms Farquharson said Bahamians needed to understand how much savings they would need to finance their retirement and the amount they need to “squirrel away” on a monthly basis to meet this goal. “You’re not going to die at the age of 65,” she added. “You have to eat, pay bills and pay taxes.”

RF Bank & Trust has some $330m in pension assets under administration across the Caribbean, including territories such as The Bahamas, the Cayman Islands and Barbados. There are a collective 15,000 employee participants in the plans it manages and administers, and some 1,100 sponsor employees.

Ms Farquharson said RF Bank & Trust has “invested over $1m” in its pension software, and revealed that the investment bank is launching a third type of pension plan - the individual group pension plan - to clients.

Describing this as “a first in The Bahamas and, I daresay, in the region, she explained that the new structure is designed to give employees “more flexibility and control” over how their retirement funds are managed. They can choose the investment options and strategies to suit their risk appetite.