So far, we have established that we do not like to think of retirement, neither do we like to save for it. There are far more urgent concerns that keep us from thinking about 20-30-40 years from now, and we always hope that the future will sort itself out. However, we also know that a back-up plan, though we hope for the best is wise. In the last post, we agreed to do a number of things:
- Sign up for a registered pension plan. This can be employer provided, or not but next week when work resumes, get those papers and sign up!
- Before you think about it too much, make up your mind to save a small amount. Can we say 5% of your gross pay?
This post looks at how to actualize the saving. Automation continues to be my greatest ally on this personal finance journey. The same will work great for your retirement savings. You can automate your retirement savings in two ways:
First, through your employer. If you have an employer sponsored scheme, this is automatic once you sign up. The accountant will be deducting a fixed amount, which they will submit to the pension scheme every month. If you have a personal scheme, you can instruct your employer in writing to deduct and submit the amount on your behalf.
The employer method has two upfront advantages:
- You are not tempted to “steal” from yourself, because the pension deduction is like a tax, taken away before the money hits your account
- The accountant automatically factors in the tax benefit as they prepare payroll, so you do not need to do any tax work personally.
The drawback here is that some employers can be tempted to delay or can fail to submit employee pension deductions, especially during hard economic times. My advice is vigilance. Get monthly/quarterly/semi-annual statements from your pension scheme to confirm that what was deducted from you was submitted. Legally, it is a crime for an employer not to submit pension dues, but you want to catch this in time, to avoid going legal.
Second is DIY: As the name suggests,DIY means you administer your pension savings, by submitting the monthly amounts to the pension scheme yourself. The advantage here is you are in total control of the fund. The disadvantages however:
- Once you make the payment, you have to give the receipt to your accountant for them to factor the benefit into your tax computations which is administratively heavy.
- It is harder to stay accountable, especially on months when money is tight.
The second is however easy to fix by automating your finances. Set a fixed monthly standing order to your pension account and forget it.
In conclusion, because we are not great at long-term thinking, we have to come up with systems that automatically factor long term thinking into our day to day decision making. So, if you are not in a pension scheme, sign up for one when you get back to work next week!
This post is one of a series sponsored by the Retirements Benefits Authority, as part of the #kulegalega campaign, aimed at educating us how pension funds work and the importance of starting to save for retirement while there still is time.