August 20, 2019 119
August 20, 2019 119
Retirement is a permanent separation from active work usually with a pension. There is no entrepreneur that would not retire. An entrepreneur may be forced to retire due to ill health, or physical disablement. He or she may also voluntarily retire due to old age and the feeling that he or she has earned his or her rest. A good retirement plan will ensure that the pain of compulsory retirement is minimized while the voluntary one provides a healthy rest that can lead to a long and fulfilled life.
Retirement benefits refer to all deferred payments which begin on the recipient leaves the active employment of the firm (whether salaried or self-employed). The payment may be either in the form of a lump sum or an annuity (equal regular payments over a specified period). In the case of the latter form, a regular adjustment will be done to increase the amount paid to accommodate the reduced purchasing power during inflationary periods.
Work is a means of obtaining a steady flow income upon which the quality of life depends. It is a means by which one’s role and status in society are defined. It is a source of identity, self-respect and self-image. It provides opportunities for engaging in social interaction.
Therefore, retirement from work creates anxieties, uncertainty and stress. Sometimes retirement results in psychological disorientation, and physical illness.
To the entrepreneur, retirement is a voluntary and independent decision. Unlike paid employees, entrepreneurs make their own decisions as to when they want to retire and the functions they want to continue to perform with respect to the enterprise. However, at some point in time, entrepreneurs must retire from work either due to old age, ill-health or some other disability.
On retirement, a great deal of uncertainty will surround the flow of income from the enterprise. Some of the perquisites associated with the former position might be reduced and their ability to continue to perform various social roles in the community might be adversely affected.
Retirement must be carefully planned because it has a major impact on the entrepreneur’s financial security, social status, physical and psychological health in order to sustain the entrepreneur’s post retirement quality of life and eliminate the stress and trauma of retirement. Retirement planning helps the potential retiree to adapt to the new situation by helping him/her to:
These savings often called esusu (African name) are of two types:
(i) A collector visits participants to collect their contributions on a regular basis – ranging from daily to monthly, while bulk withdrawal is usually at the end of the period.
(ii) A group of contributors collecting a fixed amount monthly and paying to each member on a rotational basis. These variants are short-term and are common among motor mechanics and traders. The advantages are that collections are done at the convenience of the investors, both in terms of location, size of savings and timing. The disadvantages include lack of inflation hedge though short-term; there are no long-term savings institutions available in the informal markets for retirement options although you can transfer the savings to other options like real estate. For the investor or saver to operate with the long-run, he can only rollover in one mechanism or move to another one as opportunity arises. Thus, there will be time intervals when funds will be idle with discontinuity costs.
(i) Savings Account: An entrepreneur can open a savings account with a reputable bank and plan a periodic deposit (usually monthly0 over his active years. The amount will depend on how you can afford and it can be varied upwards overtime as income improves. The periodicity may be daily, weekly, monthly or annually depending on your type of business. The advantages are that of simplicity of operation security and management. The disadvantages include easy access for spending and thus require commitment. The interest rate is low, and is subject to negative inflation effect. Although savings accounts can be operated in perpetuity, it is advised that when funds become substantial, they can be moved to fixed deposits to take advantage of better interest rates or other securities.
(ii) Term Savings/Fixed Deposits: Banks also provide opportunities for term or fixed deposits chat earn higher interest rates than savings account. Relative to other securities, fixed deposits earn low returns but they have the advantages of security and are not easily accessed for spending.
(iii) Equity or Share Certificates: Equity capital refers to money that a business obtains from its owners. The entrepreneur can invest his retirement savings in equities of businesses of other entrepreneurs that are doing well. He can also invest blue chip companies because the investment purpose requires conservatism. While you can sell the equity holding to other people to receive the cash when in need, dividends can also provide periodic income when retired. There are reared entrepreneurs that receive a million naira every year as dividends from shares accumulated over the years. The advantages include share appreciation and participation in profit sharing as dividends. The disadvantages include double taxation and total loss in case of corporate failure.
(iv) Real Estate: Adequate savings can be used for real estate development where rental and lease fees as well appreciation can yield good income. Most real estate investments increase in value and eventually sell at a profit. Hence, they are preferred during inflationary periods. Success in real estate investment is a function of location of the property. The major disadvantage is the heavy financial layout required to acquire any reasonable real estate. The programmatic approach of most people is to acquire and secure a plot with registration with appropriate authorities, and gradually build over years as funding is acquired. For people that cannot afford multiple buildings, a multi-purpose flexible house is recommended that can accommodate the owner, provide rent from residential and commercial renters.
(v) Precious Metals: Retirement savings can be held in precious metals such as gold, silver and diamond. They do store value well and appreciate but security can be a major problem. Another problem is the skill to identify and purchase unadulterated or pure precious metals. The security problem may be minimized by putting them in safe boxes in banks.
(vi) Mutual Funds/Unit Trust Funds: Mutual funds or unit trusts are collective investments that utilize small savers funds for investment in the capital markets. This is an investment alternative where people pool their money to buy shares, bonds, and other securities selected by professional managers employed, by the investment company. Mutual funds allow diversification of the portfolio of small holders. Important aspects to check out for before investing in these schemes include the credibility of the managers or parent company of the Fund, its Trustees, their expertise, financial and management history, asset backup, and immediate characteristics such as minimum subscriptions and investment focus. The modem ones offer quotation, assurance cover and marketability.
The way to participate is for entrepreneur that has saved some money in his savings account to select a Trust and invest his money instead of moving it to a fixed deposit.
(vii) Treasury Securities: These consists of “Treasury bills which are investments and in small denominations, and CBN certificates of 180-day and 360day tenors but with minimum investment of N250,000 and multiples of N50,000. They are available through banks and discount houses. All the entrepreneur has to do is to issue instructions backed with funds to his banker. They are very secured and opportunities for rollover should be utilized to bridge the mismatch between the instrument and the investment purpose of the saver.
(viii) Bonds/Debentures: Corporate and government bonds are investment options. A corporate bond (often called debenture) is a corporation’s written pledge to repay a specific amount of money, along with interest while a government (whether federal, state and local government) bond is the written pledge of a government or a municipality to repay a specified sum of money, along with interest. When you buy a bond, you are lending money to the issuer. Important considerations include whether or not the bond will be repaid at maturity and whether the organization will be able to service the interest payments. The investment is usually medium to long-term hence appropriate for pension planning. The advantages are that the interest returns are fixed while pegging to the Minimum Rediscount Rate dampens inflation impact. Moreover, sinking fund is provided for liquidity and they have tax shelter. The investment is secured and the yield is high.
(ix) Foreign Currencies: To hedge against high rate of domestic inflation, savings can be held in foreign currencies in domiciliary account or in offshore deposit account. Security risk will not allow my serious entrepreneur to keep large amounts of such currencies at home. To minimize security problem such funds may be invested in securities (treasury and blue chips) denominated in stale currencies such as American dollars, Pound Sterling and Euro.
(x) Insurance Such as Pension Funds and Endowments: Packaged pensions plans, which are standard packages are usually offered by registered pension managers especially insurance companies. Available plans include family income benefits, endowment assurance, whole life assurance, educational endowment assurance, mortgage protection assurance, term assurance, prosperity plans, and personal investment life assurance.
These schemes are essentially annuities. An annuity is a financial contract written by an insurance company that provides die insured with a regular income. The payment is usually monthly as long as one lives. The payments may begin at once (immediate annuity) or at some future date (deferred annuity). Immediate annuities are usually purchased by people of retirement age with a lump-sum payment while deferred annuities are often purchased by young people, with interests building up on deposits. Whether you buy it with a single payment or with periodic payments, the annuity payments will exceed premiums and thus provide lifelong security.
Income Annuity Options include:
(a) Life Income or Life Only: This provides lifetime income. It provides the highest income stream. You receive income payments for life which ceases upon death. It is often used by single people with limited sources of additional income.
(b) Life with Period Certain: This has lifetime income with minimum number of payments guaranteed. With lower monthly income it pays income for the rest of your life and if death occurs before a specified number of payments, the beneficiary will receive the balance. This is often preferred by people with heirs in the event of premature death. Matured Nigerians who always plan to provide tor their children can get an insurance company to design this for them.
(c) Joint and Survivor: This provides lifelong income for two. With still lower stream of income, it provides income payments for as long as the two persons are alive, but if one dies, income continues to be paid to the living person (usually a spouse) at 100% of original amount (if no other source of income) or 66 2/3 or 50% (when there are other sources).
Annuities can be fixed (providing specific income for life) or variable (with payouts above a guaranteed minimum level); the rate often pegged to market rates. The advantages of variable annuities are investment flexibility, potential for higher returns, increased investment risk, hedge against inflation, and control over type of investment in the annuity. The advantages of fixed annuities are of principal and earnings and guaranteed interest rate.
(xii) Social Insurance Trust Fund: The Nigeria Social Insurance Trust Fund (NSITF) was established by Decree No.73 of 1993 and it replaced the defunct National Provident Fund (NPF) scheme with effect from 1st July, 1994. It is mandatory for employers and employees of the private sector, and it was established by the Federal Government of Nigeria for the protection of workers against the loss of employment in the event of old age, invalidity or death. It could be operated along with any other private pension scheme that may exist. It accommodates voluntary membership and temporary/casual employees.
This pension plan allows portability as employees who change employment can maintain continuity of the scheme by showing their certificate of membership or quote their registration number to their new employers.
(xi) Non-insurance Pension Managers: They organize and managed pension plans for individuals and organizations for some fees. They relieve the clients the tasks of designing and implementing pension plans.
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