This new year, think big, make your top new year’s resolution retirement. Conventional wisdom says to create small, manageable new years resolutions, that are easy to accomplish. Lose ten pounds, join a gym, get better organized, all are typical new year’s resolutions. And saving more money for retirement, increasing your 401k contributions, reducing your debt, are great retirement new year’s resolutions as well. But why not consider going for the whole thing this year? Why not retire in 2008?

You may be in a position to retire in 2008. You may be wealthier than you realize. But listening to conventional wisdom, and thinking small, may cause you to miss the great retirement opportunity of 2008!

According to the U.S. Census Bureau. In April of 2007, 15 million American Households had a net

worth over $500,000. That means 15 million American Families can stop working right now. An individual can retire on even less. Over 30 million American Adults don’t need to be working! Unfortunately, since the time of that report, the two assets that make up the majority of Americans net worth, housing prices and stock values, have both been on the decline.

And many economists are predicting, lower house values and the strong possibility of a recession, in the coming year. So while you are achieving your small and manageable retirement resolution, increasing your 401k contribution in 2008 for example, the overall value of your retirement portfolio may be dramatically lower at the end of the year. You may be in a better position to retire now, than you will be again, for many years to come. This is not the time, to be thinking small, or for conventional wisdom.

Conventional wisdom says you need to be rich to retire. Conventional wisdom is often wrong. The truth is you don’t need to be rich to retire. Conventional wisdom in the retirement industry for instance, assumes you will consume, between 70 – 80% of your current income, annually in retirement. It’s a guess. It’s a “Consumption Assumption”, that forces you to save more money than you need for retirement, and causes you to delay retirement. If you are prepared to challenge conventional wisdom, and think big, you may be able to retire in 2008.

But how do you know if you have enough savings to retire in 2008? That depends – on how much you need to spend in retirement. You determine how much you need to spend in retirement, therefore, you determine how much savings you need for retirement. It’s really that simple, and to make it even easier, here are some free retirement tools to help you achieve retirement this year.Free Retirement Guide – This 15 page retirement guide destroys conventional wisdom, and reveals the secret to early retirement, the formula to accurately calculate retirement, and much more. Budget 2008 Retirement Software – Your retirement budget, the amount of money you are going to spend in retirement, is the crucial element in calculating if you have enough savings for retirement. This free retirement software enables you to easily create a budget, track your current monthly expenses for all of 2008, and plan for your retirement. Retirement Widget – A fun little desktop widget, to remind you how much time you have left, to retire in 2008.

This new year make your 2008 top new year’s resolution retirement. Thinking big, and challenging conventional wisdom, may lead you to retirement in 2008.

 OVERVIEW:

 

The NASSIT Act, 2001 established a virtual state-monopoly in the NASSIT for the management and investment of pension funds in Sierra Leone. However, as is generally the case with monopolies and especially quasi governmental monopolies in Sierra Leone, we must continue to be vigilant and guard against inefficiencies in management and oversight, politically-driven investments, political interference, nepotism and a blotted bureaucracy which have in the past become hallmarks and recipes precipitating their subsequent failures and demise.

 

It is thus against this backdrop that the continued viability of the current retirement system remains to be seen especially as we continue to await the second statutory actuarial evaluation report and the failure by the Trust since 2006 to post an annual report encompassing the Trust’s operational performance and audited financial accounts for the fiscal years 2007 and 2008 (NASSIT website: www.nassitsl.org). Management and the Trustees must be reminded that pursuant to Section 16(1) of the NASSIT Act No.5 of 2001, the Trust is by law required to submit and publicly file such annual reports.

 

LONGEVITY RISK:

 

Despite the still very low life expectancy rate currently estimated at 41.24 years (CIA World Fact book Report March, 2009) and high infant mortality rate of 154.43 deaths per 1000 live births (UNDP Human Development Report, 2008) in Sierra Leone, the past few years have witnessed positive, though minimal movements in data reflecting a decrease in the nation’s longevity risk. This is borne from a comparative analysis of life expectancy figures of 35.4 years from 1970 to 1975 to 41.0 years in the period from 2000 to 2005 to the current 41.24 years estimated for 2009. Generally, the longevity risk in retirement is the hazard of aging and uncertainty of knowing how long one will live and how long social security retirement benefits, such as provided by the National Social Security and Insurance Trust (NASSIT) can go before one runs out of retirement funds prior to death. The focus of this article is thus how can one minimize the risk of running out of money in retirement through the use of annuities and retirement funds?

 

The Society of Actuaries in a survey report entitled “Key Findings and Issues: How Americans Understand and Manage their Retirement Risks” identified the following retirement risks viz: outliving assets; loss of spouse; decline in bodily function; healthcare and medical expenses and inflation. These retirement risks are not unique only to Americans as the same basic risks confront retirees in Sierra Leone as they seek to understand and manage their retirement options. Generally the most common retirement risks are categorized as follows:

 

According to the latest published data by NASSIT (NASSIT at a Glance Facts & Figures as at June 2008), the monthly average retirement pension payable currently in Sierra Leone is a paltry SLL108, 504.72 (One hundred and eight thousand five hundred and four Leones and seventy two cents). This amount represents a fraction of retirement income required by employees for basic sustenance in the current economic environment in Sierra Leone, where even a bag of rice costs more than the average monthly retirement provided by NASSIT. A retiree with even a modest family, not to mention our extended family system, would be hard pressed to provide and maintain a household based solely on the pension currently provided by NASSIT.

 

With a majority of the participants either at average or below average income earnings and hence contributing at the average and below average rates, it stands to reason that most of the scheme participants will not be eligible to receive pensions at even the modest average amount as currently computed by the NASSIT actuaries.  Thus, the goal of a comfortable retirement envisaged by the architects of the NASSIT risks becoming a fleeting illusion, unless other new retirement options and vehicles are incorporated into the nation’s retirement and social safety network.

 

As postulated by Kerry Pechter in her book “Annuities for Dummies”, “many people confidently walk the financial high wire of life without a safety net. Others, especially those who are approaching retirement, feel more secure when a net is there to catch them-just in case the tightrope snaps”. In the Sierra Leonean context however the social protection and safety net is needed by all and not just a few, thus my continued passion in ensuring that the Trust is professionally run and maintains accountability consistent with actuarial, retirement and insurance principles.

 

REPEAL THE NASSIT MONOPOLY:

 For with the inability of the NASSIT to provide the requisite financial safety net, based on the current actuarial projections, it is but prudent that government seeks to break up the NASSIT’s near monopoly over pension fund management in Sierra Leone to allow not only life insurance and annuity companies but more so retirement funds to establish and manage employer-sponsored retirement plans.

 

The NASSIT model is akin to the Social Security system in the United States which as a hybrid defined contribution and defined benefit plan, establishes and sets a fixed percentage both employees and employers contribute and also defines the benefit formula participants receive at retirement. As a result of conservative projections and outright ill-advised investments with little or no redeemable value-added equity to be realized in some investments even in the long term, the NASSIT cannot be solely relied on by Sierra Leonean workers for their retirement needs.

 

With the repeal of the NASSIT monopoly, employer sponsored retirement plans and annuities, with an investment and insurance component will be established and marketed to allow employees to save and invest in their own retirement.  

 

THIRD SCHEDULE RETIREMENT FUNDS: What are they?

 

What I have elected to dub “Third Schedule Retirement Funds” emanates from provisions in the third schedule of the Sierra Leone Income Tax Act, 2000, which provides for the establishment of complying retirement funds with the approval of the National Revenue Authority (NRA) Commissioner.

 

This little known provision in our tax code already provides the legal and regulatory framework for the establishment of individual retirement accounts managed by these so-called Third Schedule Retirement Funds in Sierra Leone. These are intended to augment and provide other guaranteed income during retirement separate and aside from the NASSIT pension. Moreover, these retirement plans allow employees to save and invest for their own retirement by the employee authorizing the employer to deduct a certain percentage of his/her wages to be invested in the employer-sponsored plan.

 

Tax incentives and deferrals are usually provided by governments to encourage retirement planning, savings and participation.  Amounts contributed by employees into such plans are not taxable resulting in a larger carry home paycheck monthly. Moreover, as an employee benefit, employers also contribute a percentage into their employees’ retirement accounts, with a concomitant tax savings by the employer.

 

However, the provisions of The First Schedule Part IV of the Income Tax Act, 2000 which requires a 15% withholding from payments on pensions and annuities needs to be repealed as it is regressive and discourages retirement savings. It is also envisaged that employee contributions are on a pre-tax basis so that employees participating in these retirement funds can take advantage of favorable tax brackets and rates.  As an example, the tax rate for individuals with incomes over 480,000.00 Leones is 25% per annum while the tax rate for individuals earning over 7,500,000.00 Leones is 40%.

 

The United States based African-focused reinsurance consultancy company, Saddleback Re, in California managed by the author has over the past few months designed annuities and retirement policies to be introduced in Sierra Leone and managed under the provisions of the Sierra Leone Tax Code. Additional information on these retirement vehicles can be addressed to admin@saddlebackre.com.

 

ANNUITIES:  

 Annuities, whether fixed or variable, immediate or deferred are generally retirement tools or vehicles designed to supplement an employee’s retirement income and guarantee pension-like income over the life of the annuitant or beneficiary. These are only issued by insurance companies and have both a hybrid insurance contract and investment features.

 An income annuity generally provides for conversion of a large sum of cash into monthly, quarterly or an ann ual payout wherein an insurance company agrees to pay the annuitant or beneficiary an income over a certain period of time.

 According to the Sierra Leone Insurance Commission (SLICOM) 2006 Annual Report, the Life Insurance business sector is serviced by only 3 insurance companies, with a net industry wide premium of 1,323,640,000.00 Leones; with Aureol Insurance Company dominating with a 104% share of the market. Thus annuities which are principally life insurance contracts still have a long way to penetrate the Sierra Leone insurance marketplace.

 THE SOCIAL SAFETY NET PROGRAM AS AN ANNUITY:

 The Social Safety Net Program currently managed by the Ministry of Employment and Social Security represents a program that should have better been managed as an annuity. During the program’s launching in 2006, President Kabbah stated that “NASSIT has been able to pay back over 5.3 billion towards the establishment of the Social Safety Net Scheme. Additional support to the scheme amounting to 5.0 billion Leones will be made by government”. The program launched by President Kabbah in 2006 with paid up capital of 5.7 billion Leones and additional 5.0 billion investment pledged by government was designed to be administered by NASSIT, without any administrative costs and projected to reach an estimated 16,000 extremely vulnerable households, as a component of the country’s 2005 to 2007 Poverty Reduction Strategy Paper (PRSP).

 

However, since the Social Safety Net pilot adopted a cash transfer scheme the following has been expended, according to Ministry of Employment and Social Security presentation at the Regional Experts Group Meeting on Social Protection in Dakar, June 2008:

 

From the above figures the program as managed and supervised by the Ministry of Employment and Social Security clearly lacks long term sustainability, is too short term and lacking an entrepreneurial oriented vision. For with the amount of the initial seed money having been used to purchase annuities for all the participants in the targeted groupings, the benefits of retirement income and savings that annuities provide would have been made available to some of the most vulnerable members of our society. Rather the decisions of transferring management of the program from NASSITT, where the funds would have been better managed and invested to a Ministry program was a recipe for failure.

 

You may find yourself in the category of individuals who even though you are dissatisfied with your job and have enough finanacial resources, you may not be ready for full time retirement. For many, full time reitrement may become a death sentence if they think they want to look forward to fishing or playing golf every day. They will soon become bored wit this routine. If you have some doubts about whether you are ready for full time reitrement, you probably are  not ready to leave the work force. However, there are other considerations you must take into account such as your age,  your health, the health of your spouse, your attitude toward leisure, and how much you like being around your work colleagues.

Before you consider full retirement you must consider the following signs that will indicate to you that you are not ready for full time retirement. You think that retirement will make you happy and if you think this way you may be very disappointed in retirement. If you have no hobbies out side of work,  you will most likely not find full retirement what you were expecting. If your best friends are at work and all of your social functions are work related, then full time retirement will again be a disappointment to you. If you break into a cold sweat thinking about spending all of your time with your spouse, you are not ready especially if your spouse on weekends complains about you getting into her or his hair. If you are a workaholic and constantly think about work, you are not ready for full time retirement.

So why not develop a method of having your cake and eating it too, Investigate part time retirement. Semi-retirement has its positive sides as you can develop a freer lifestyle and continue the positives being in the work force. Semi-retirement will allow you to still feel productive along with maintaining relationships with your work colleagues. While continuing to be creative at work, you will also be able to get out of your spouse’s hair.

Semi-retirement is a way to go graceully from full employment to full time retirement. This can allow time to change gears from one environment to another. Semi-retirement will also allow you more leisure time to develop interests outside of your job so that you will be better equipped to enter full retirement.

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Why do we use this expression?  Why is a member of the aristocracy called a “blueblood”? The Spanish once had the notion that the veins in the skin of men and women of aristocratic families were bluer that those in lower stations of life.