Never Too Early to Plan Ahead

Your company may not fully fund your retirement, so best to start now on your own plan.

As chief executive of a big state-owned company, Djoko Widjaja (not his real name) had expected a comfortable retirement. He assumed that he’d receive a monthly pension from his employer that would be large enough to cover his daily needs. Unfortunately, that didn’t happen when he retired in 2005.

He received Rp 2 million per month, just a fraction of what he got as CEO, which was the equivalent of about Rp 150 million per month. Why so little? It is because the Rp 2 million actually matches his old basic salary. Most of what he received in the Rp 150 million monthly was not his basic salary, such as payments for his children’s education, gasoline allowance and a communication allowance.

“Many people don’t know how much money they will receive in their pensions. As for those working at government institutions, the employee’s pension fund is actually calculated based on their basic salary. By the time they realize this, it’s often already too late as they are about retire or getting close to it,” says Aidil Akbar Madjid, founder of Akbar’s Financial Check-Up, one of the country’s top financial planners.

©  Forbes Indonesia

Widjaja’s case is all too common when it come to retirement pensions. Even a top executive in a state-owned company may only be entitled to a meager amount in their monthly pensions. It’s a major issue facing many professionals in the country. Some 65% of those in retirement don’t have the ability to fulfill their daily needs, while another 60% of those in retirement solely depend on their Jamsostek fund issued by the state-owned insurance company PT Jamsostek –meant as a supplement rather than the primary source of funds, according to the latest regional Life Outlook Index survey by insurance giant AXA. The Jamsostek fund is meant to be a safety net not the main source of funding for retirees. And only 21% know the amount of money they’ll receive from their pensions when they retire, according to the AXA survey.

Unfortunately, if even top executives have little clue on how much money they’ll get from their pensions, it is even tougher for regular professionals.

Starting age

While many companies do try to prepare their employees for retirement with special educational seminars, they often target the wrong age, with the youngest participants age of 49, which is the youngest age qualification for a pension, and the oldest is 53, nearly retirement if the pension age is 55. “The seminar should be conducted when employees are 25 to 35 years old, so there is still plenty of time to prepare for retirement,” says Aidil.

On the other hand, Mike Rini Sutikno, founder of Mike Rini and Associates, seems to be more flexible when advising about the right time to set up a retirement plan. “It’s never too late to start planning your retirement. Yes, it is good to start earlier, but you can plan it at any age,” she says. The earlier you start, the smaller the amount you’ll need to invest to build a retirement fund. Conversely, if the retirement preparation period is shorter, the amount that you should be setting aside for your retirement should be larger, she says. A good retirement fund is about having passive income to fulfill your needs in your retirement years from money you collected today. The passive income should be able to support you in your chosen lifestyle during retirement.

Mike says the first thing you should do when setting up a retirement fund is to decide at what age you want to retire. Then, what kind of lifestyle you will adopt? Are you going to keep your current lifestyle or be a bit more modest? That is all up to you, as long as it makes you happy in your golden years. Second, calculate how much money you’ll need in the future to support your lifestyle. By doing this you will know how much money to accumulate for retirement.

Risk factors

Mike feels that your lifestyle expenses during retirement should be lower than today because most people can save on such expenses as taking of children or going to the office every day. Aidil, on the other hand, points out that many face the risk of spending a greater amount because of health problems, which can mean expenses for hospital, medicine, and treatment.

Another important factor to consider is inflation. The amount someone will need for retirement is not as simple as trying to ensure you have the same income as today, as inflation will erode the value of your current income, so you may have to plan for even higher income to ensure the same lifestyle. Life expectancies are also on the rise, you may live longer than you expect, which also requires tucking away a bigger sum.

The trick for executives is to build a retirement plan that combines income from their own retirement savings with that from a pension plan, says Mike. If you’re an entrepreneur who owns a business, it’s different: “The business owner has to make his or her own pension plan.” Another alternative for companies is to use one of the two national pension fund programs available aside from the Jamsostek plan. One is the employer pension fund (DPPK) and the other is the financial institution retirement fund (DPLK). Many larger companies are now using the DPLK to take care their employee retirement funds. But still, many companies didn’t give any pensions at all to employees, and the government doesn’t require companies to provide pensions.

So the responsibility for retirement funding is often solely on the individual to plan for themselves. How to do that? For some, seeking the advice of a financial planning service is the easiest way to implement a personal retirement plan. Others seek products or services from their local bank, which are offering more and more services today geared toward retirement planning.

Investment basket

Another important aspect of retirement planning is to decide what kind of investments you want to have in your retirement portfolio, says Mike. Aside from the traditional financial products such as mutual funds, stocks and bonds, there are other investments such property or owning a business, she noted.

One of the worst investments of all is, sad to say, also one of the most popular: a savings account, says Aidil. The trouble with many savings accounts is that the interest rate is well below the rate of inflation. So, over time, the individual loses money as inflation erodes the value of his savings. “Saving accounts are definitely something that I don’t recommend. The return is only around 6%, while the national inflation rate is a minimum of 15% and the real inflation rate is around 20%. So it is better to find an investment that will return a minimum of more than 20%,” says Aidil.

Many investors think property is the answer, as property prices almost automatically go up at same rate as inflation if not more, says Aidil. The one drawback of property, however, is that it is not a very liquid investment, which means if you need funds in a rush, you may have a problem. He also notes that today property prices seem overpriced, and can decline, which can be a major risk for someone looking for stable income for retirement.

To get the real benefit from your property, Mike says, it is better to sell your property a minimum of two years before retirement, and reinvest the profits into something that will provide more stable income. The exception here is rental units. Property that can be rented at a rate above their cost can provide a nice steady stream of funds that can be used for retirement. While having your own successful business can help you fund your retirement, you will need to plan carefully for someone to take over the business when you plan to retire, so the business will continue to provide income for your retirement, says Mike.

But above all, the most important thing is to make a plan on how, and where, you are going to spend your retirement years. Would you like to spend it with your family, travel around the world, learn some new things, or simply be more active in the community, she asks. “Once you retire, there will be major changes in your daily habit and routines. You have to anticipate these changes and fill it with some new activities. The key to a happy life is to stay active,” Mike says.

* This story appears in October 2010 issue of Forbes Indonesia magazine.

Cover of Forbes Indonesia launch issue 2010

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