An equity-based investment portfolio can outperform a conservative pension plan

When you’re in your 20’s or even in your 30’s, retirement may seem far off, but it is a time in our lives that most of us will eventually face. Too many retirees are forced to continue working or depend on their children for support because of poor planning.

Jamaica has a strong culture that educates us about the importance of saving. Many of us had our first bank book before we were even out of diapers. Investing on the other hand may not have crossed your mind as a viable option for preparing for your golden years. Before we break down the two reasons why an investment portfolio is better than a pension plan, let’s first discuss some common reasons why people choose not to invest.

I don’t have enough money

With the Jamaica Stock Exchange, the minimum investment of 100 shares of any listed company, can be started with as little as JMD $1,000. Sometimes all it is takes is a little creativity. In a previous article we discussed how reinvesting money you would use to purchase a beer, over the course of three years could’ve yielded over JMD $2 million. The truth is if you look at your current spending you may be able to identify areas where you can cut back to put into investments.

It’s too risky

There is a saying, “high risk, yields high rewards.” The truth is yes, there are risks involved with investing in equities, but as an investor, you can choose a strategy that suits your risk. All of life bears risk and there are several tasks that we undertake on a daily basis that contain risk. An example is driving a car, or being a pedestrian. Even putting your savings under their mattress is at risk to natural disasters or theft. A trusted financial advisor with a solid performance track record is one factor that can diminish investment risk.

I don’t know where to start

Luckily, not only is there a plethora of information provided for free online, you can also meet with a professional to discuss your concerns. In many cases you don’t have to do it alone.

Now, that we have dispelled some common misconceptions, it is time to share our top 2 reasons why it is better to invest for your retirement.

1. Greater growth potential

Your savings won’t do much if it is sitting in a low bearing interest account. Big ticket goals like purchasing your first home or saving to send your children to college will likely be a very slow and painful process if you choose this route in the absence of high income levels at the outset. Equity investing can enable you to experience more growth, limited disposable income notwithstanding. The rationale is a consistent dividend yield above the Bank of Jamaica (BOJ) Base Rate and capital gain over time. Over time, dividend yields have the distinct potential of replacing or at the very least, supplementing your monthly income post-retirement.

2. Time is your friend

An early start to investing for retirement is likely to enhance your capacity to weather the inevitable ups and downs of the market. When the market is down, it will give you an opportunity to “buy low”, and ride the wave back up. With time on your side you have more flexibility which will lead to greater growth.

Due to inflation a pension fund may not experience the same outcome over many years as the cost of living tends to rise with time also. JMD $10,000 won’t go as far in 2054 as it does in 2017. Therefore, you could with good intentions, contribute to a pension fund each month and still have to lower your standard of living upon retirement.

Hopefully, these reasons have convinced you to consider investing in equities for your retirement as a viable option. Ultimately, the best thing to do is to do your research, outline your goals, and speak to an advisor to determine if this is the right path for you.