By Leslie Wright
Neil was upset with his financial advisor. "He should
have helped me plan my pension better," he told me. "Now I’m going to have
to rethink my retirement planning all over again!"
The reason why Neil was so upset is because he feels he had been lulled
into a false sense of security by that advisor, whom he had trusted to give him the best
advice, and which he now feels he didn’t receive.
"He just sold me a savings plan," he complained. "He never
told me what I really needed."
This is what transpired, and a story I hear all too often.
Wants versus Needs
When Neil reached his fortieth birthday, he realised he was about halfway
through his working life, but hadn’t made any arrangements for funding his
retirement. So he went to a local financial services firm for advice on setting up a
pension plan.
They asked him what he could comfortably afford, and recommended a savings
plan for him at that figure, which he signed up for. That was five years ago.
This so-called ‘offshore pension plan’ will mature on his
sixtieth birthday, so has another 15 years to run.
Then some months ago Neil read the article in this column on retirement
planning, and that started him wondering whether the scheme he had bought some years
earlier would in fact be adequate to provide for his family’s comfortable retirement.
He considered contacting me, "just to set my mind at ease," as
he later told me, but was too busy at the time transferring his business from Bangkok to
Pattaya, so this idea got put on the back burner and later slipped his mind.
Recently, however, the subject of pension planning came up in the course
of conversation with a friend, who was enthusiastically describing how I had helped him
plan for his retirement by using a sophisticated computer program to work out just how
much he needed to put aside to build a pension fund.
This friend told Neil that "the figure came as a bit of a shock, and
more than I can really afford right now, but I couldn’t argue with the numbers
because clearly that’s what I need to save if I’m going to have enough to retire
on comfortably."
On hearing this Neil decided he’d better contact me to see whether
the offshore pension plan he’d bought five years ago was sufficient, or not.
"Better to get the bad news out of the way now, while I can still do
something about it, than leave it till I’m due to retire, when it’ll be too
late!" he told me when we met a few days later.
The Factors List
As I told Neil, in order to plan for your retirement properly, several
factors have to be taken into account.
First, at what age do you plan to retire? Then, in which country do you
plan to live, and what is the likely long-term inflation figure in that country?
Third, how much in today’s money will you need each month to maintain
your lifestyle in your chosen location? Then, how long are you likely to live? Also, if
you have a much younger wife, will consideration have to be given to supporting your
family for a lengthy period after you die; and if so, for how long?
The remaining factor (other than expected growth of the underlying
investments) is how old you are now, and is in fact the only one about which no
assumptions have to be made. All the others are more or less guesswork.
Living in Pattaya is considerably cheaper than living in Sydney, London or
San Francisco. However, the long-term inflation figure in Thailand has been and will
probably continue to be considerably higher than in Australia, the U.K. or the United
States.
People are living longer now than they did in our grandparents’
generation, and it is likely that Neil will see his 80th birthday, and possibly later
ones, according to the latest actuarial figures. His parents are both still alive, and in
their seventies; his grandparents also lived into their 70s, but all died before reaching
80.
His wife is Thai, 10 years younger than he is, and she may see her 80th
birthday as well. (In general, women tend to live longer than men, although the average
life expectancy of Thais is less than that of most Europeans.)
Neil thinks he will remain in Thailand after he stops working, and wants
to ensure his retirement fund will provide for his wife until she is 80.
In today’s terms, Neil thinks his family can live comfortably on the
equivalent of US$1,000 a month, and he considers 10% as a reasonable long-term inflation
figure for Thailand.
"The Government admits it’s been at least that for a number of
years, and I don’t see it coming down to much less than that figure," he told
me.
Moment of Truth
Now we had all the pertinent data based on reasonable assumptions, we
could feed these numbers into the computer and see approximately how much Neil will need
to save over the next 15 years to provide for his family over the following 30 years
(bearing in mind that his wife is now only 35, that Neil wants to retire in 15 years time
at age 60, and although he expects to live for another 20 years, he also wants to provide
for his wife until she’s 80.)
To provide for 30 years’ income of $1,000 a month in today’s
money from only 15 years’ contributions and indexing this against 10% inflation, it
would be extremely naïve to expect to have to contribute less than $1,000 a month into
his retirement fund - but that is of course what had happened.
Neil (and many others I’ve met over the years) have somehow imagined
that putting two or three hundred dollars a month into offshore funds for a few years
would miraculously produce them "a pension" of almost unlimited scope,
forgetting that the average long-term growth of a medium-risk portfolio of offshore funds
is about 10% per annum in US$ terms.
(It is worth considering, incidentally, that this compares very favourably
with growth in US$ bank deposits at around 5-6% and U.S. inflation at around 3%.)
But with inflation at 10%, average long-term growth of such a portfolio of
offshore funds is only just keeping pace with inflation.
(Critics may therefore say that it would be better to keep their money in
Thai Baht deposits earning up to 17% in some local banks, and I shan’t bother to
explain for the 17th time that the currency risk has to be taken into consideration, which
offsets this enticing interest rate by a disproportionate amount. Risk has to be weighed
against return, and a number of clients now regret not having followed this advice last
year...)
The computer told us that if Neil wants to retire at 60, he will need to
have built up the substantial capital sum of $1,440,000 by 2013 to provide a pension
equivalent to only $1,000 a month in 1998 money for himself and his wife until she reaches
80.
It is somewhat horrifying to note that if inflation were to continue
compounding at 10% p.a., when Neil retires in 2013 his required monthly pension of $1,000
in 1998 money will have inflated to $4,177 and by the time his wife reaches her 80th
birthday in the year 2042 this figure will have grown to $66,264! I know this sounds
ridiculous, but that’s the harsh and very real effect of inflation, folks. (Or the
miracle of compounding growth, depending on your point of view.)
To build this capital using one of the better long-term offshore savings
plans on the market today (which permits escalating contributions each year to offset
inflation and keep pace with increasing income), Neil would have to contribute just under
US$2,100 a month to start with, and increase this by 10% each year over the next 15 years,
assuming the underlying investment funds grow at an average annual growth of 10% p.a.
(In practice, of course, in some years offshore investment funds do much
better than that, and in some years worse, but 10% is a reasonable and provable long-term
figure for a medium-risk portfolio. Also, even in the ‘bad’ years, Neil will be
benefiting from the principle of dollar-cost averaging whereby he’s acquiring a lot
more ‘cheap’ units in poor-performing years, and less ‘expensive’ ones
in the better years, meaning he ends up paying an ‘average’ price for his units,
and his plan will do a good job for him in the long term no matter what the markets do in
the short term.)
Neil would have contributed a total of just under $800,000 into his
pension fund over the next 15 years, from which he and his wife would draw down a total of
over $8 million in the course of the following 30 years. A very good return, I think.
Sacrifice now or later
Neil’s first reaction was, "This is horrible! I can’t
afford to save this much each month!"
I fully expected this, because it comes as a shock to most people when
faced for the first time with just how much capital is really required to provide for a
comfortable retirement.
And few financial advisors will take the risk of telling them, for fear of
losing the client.
The answer I gave Neil was that now we know how much medicine is required
to make you better, we can start you off on the number of pills you can afford, and
increase the dosage as time goes by.
Yes, it may be a bitter pill you have to swallow. Yes, some sacrifices
will be called for. But at least we now have a diagnosis of the problem, and a
prescription for the future. You have the choice between making some changes now, to
enable you to build a meaningful retirement fund, or making even more painful sacrifices
when you retire with not enough capital to live comfortably for the rest of your lives.
After he’d studied the figures carefully, Neil muttered, "I wish
my other advisor had shown me these figures five years ago instead of just signing me up
for the figure I wanted to save then."
He was absolutely right. He’d have had an extra five years in which
to make some small sacrifices which would have paid off immensely in the long run.
As an academic exercise, I ran the program again, just to see what the
difference would have been had we met 5 years earlier.
Making the same assumptions, Neil would have had to contribute only $1,560
a month at the start (instead of $2,100), and would have contributed a total over 20 years
of just over $1 million into his pension fund, from which he and his wife would draw down
a massive $13.2 million during their retirement years.
More for less
But in fact even this was misleading, because the drawdown figure 5 years
ago would not have been $1,000 (taking 10% inflation into account going backwards as well
as forwards), but only $683.
We therefore ran the program again, using this corrected figure.
The result was that had Neil started a properly structured retirement
funding program five years ago, based on his requiring a pension of $683 a month in 1993
money to live on, he’d have needed to contribute only $1,070 a month into the program
to start with - less than half what he now needs to contribute to achieve the same result.
This brings home the cost of delay in harsh and no uncertain terms.
Over the 20 years between 1993 and 2012 he would have contributed a total
of only $735,000 (as opposed to nearly $800,000 as he now will have to feed into the same
plan.) From this he could have expected to draw down a total of just over $9 million,
compared with a bit more than $8 million from the plan he is starting now, five years
late. He would have got far more for far less if his retirement planning had been done
better, earlier.
And this is why he was so upset when he first came to see me. At least now
he is content that he has made proper provision for his family’s long-term financial
security. Have you?
If you have any comments or queries on this article, or about other
topics concerning investment matters, write to Leslie Wright, c/o Family Money, Pattaya
Mail, or fax him directly on (038) 232522 or e-mail him at [email protected]. Further
details and back articles can be accessed on his firm’s website on
www.westminsterthailand.com.
Leslie Wright is Managing Director of Westminster Portfolio Services
(Thailand) Ltd., a firm of independent financial advisors providing advice to expatriate
residents of the Eastern Seaboard on personal financial planning and international
investments.
by Laura Zubrod,
Registered Dietitian
When people hear the term "food additives" they
tend to think of complex chemical compounds that are harmful to eat. Food additives play
an important role in today’s food supply. Additives are used to increase nutritional
value, to maintain the freshness and safety of food, in food preparation and processing,
and for enhancing the flavor and appeal of foods. Food additives keep bread from molding,
prevent salad dressing and peanut butter from separating, keep cured meats safe to eat,
give margarine its yellow color, and improve the nutritional value of biscuits, pasta,
flour, and cereals.
Although you probably would not consider them additives, sugar, salt, and
corn syrup are among the most common. By definition, a food additive is a component added
to food to affect its characteristics. Food additives are not something new. Our ancestors
used salt to preserve meats and fish, herbs and spices to improve flavor, sugar to
preserve fruit, and vinegar to pickle foods. With improved technology, we have increased
the use of food additives. Today more than 2,800 substances are used as food additives.
Food additives in the United States and Europe are extensively tested and
regulated. As with all foods in your diet, moderation is the key to enjoying a safe and
healthful diet. Some additives could be potentially harmful in excess. Saccharine can
cause cancer in laboratory rats and salt has been linked to high blood pressure. Typically
the more processing a food undergoes, the more additives it contains. Eating whole grains,
vegetables, fruit, lean meat and poultry, and low-fat dairy foods is a nutritious diet
that is low in fat, sodium, and sugar, and high in fiber. This type of diet allows you to
enjoy the benefits of food additives. Some individuals may be sensitive to certain
additives and need to avoid them. Such additives may include aspartame, MSG, sulfites, and
food colorings.
Additives used to increase the nutritional value of food include fiber,
vitamins, and minerals. The word "enriched" on food labels means nutrients that
were lost during processing are added back in. "Fortified" means nutrients not
present in the food are added to enhance the nutritional quality. Enriched or fortified
foods include bread, cereal, flour, margarine, milk, pasta, rice, and salt. Due to
enrichment and fortification practices in the last 75 years, nutritional deficiency
diseases are no longer common.
Food additives, called preservatives, slow the process of spoilage and
keep foods fresh and safe to eat. Tocopererols (vitamin E) are found in vegetable oils and
salad dressings to prevent them from becoming rancid. Calcium propionate is produced
naturally in Swiss cheese and is used to keep bread and other baked foods from getting
moldy. Sodium nitrite is used to preserve processed meats such as ham, sausages, and
luncheon meats. It also contributes to the flavor and pink color of processed meats.
Many additives are used in food processing to maintain quality. We find
emulsifiers that keep peanut butter from separating. Thickeners and stabilizers such as
pectin and gelatin give food a uniform texture-they keep ice cream smooth and creamy. Many
fat- or calorie-reduced foods have vegetable gums: xanthan gum guar, locust bean, and
carrageenan. Vegetable gums improve texture, viscosity, or stability. Anti-caking agents
such as calcium silicate keep baking powder, salt, sugar, and seasonings from clumping.
Baking soda, baking powder, and yeast are additives used to make dough rise.
Colorings, flavorings, flavor enhancers, and sweeteners are added to foods
to enhance eating enjoyment. Food colors can restore foods to their original color, ensure
a uniform color, help protect flavor and light-sensitive vitamins, and give an attractive
appearance. Salt and MSG are added to canned foods, processed meats, sauces, soups, and
many other foods to enhance the natural flavors of the food. Sweeteners like sucrose,
fructose, dextrose, and sorbitol add a sweet flavor, add to texture and mouth feel, work
as browning agents, and may be used as preservatives.
Modern methods of agriculture, food processing, biotechnology, and
transportation work together to bring us fresh and safe food. Knowing about additives is
important but the focus should be on the foods themselves. Choosing the best foods to fuel
your body means low-fat, high-fiber, whole-grain, vitamin-rich and a balance between fresh
and processed foods.
Readers may write Laura care of the Pattaya Mail with questions or
special topics they would like to see addressed.
Dear Hillary,