There are a number of reasons why people end their working careers with inadequate income for their retirement. Surprisingly, membership of a pension fund happens to be one of them.
While a pension fund remains the cornerstone of many retirement plans, it can also be a poverty trap. This is because it lulls one into a false sense of security. Even after exceptionally long service, your pension fund will provide you with a retirement income which will be no where near to what you earned the month before you retired.
I come across many people who have spent years working for a company without even bothering to read and understand the rules of the company's pension fund.
While things have changed in recent years, many companies still do not make their pension fund rules readily available and employees battle to get an explanation of the rules. But it is one of the most important documents you will ever read, as it can determine how well (or how badly) you live during your retirement.
If you are a member of a retirement fund, either a defined contribution or a defined benefit fund, ask for the rules and ask someone to calculate your future retirement benefits.
It is important to understand the difference between a defined contribution and a defined benefit fund.
The former basically works as a saving account. Your contributions plus the company's contribution are invested. At the end of your working life, the full value of your fund is used to determine your retirement benefits.
A defined benefit is substantially different. Your retirement benefits are defined in terms of the rules of the fund and are usually based on your years of membership and your final salary.
With most defined benefit pension funds the retirement income or pension is arrived at as follows:
* The average of the member's income over the last three years before retirement is calculated. Some pension funds take an average over the last five years, which of course is less beneficial to you.
* Two percent is allocated for each year of membership and this total percentage is applied to the average obtained in the first step.
For example, if somebody had 30 years' service at retirement, using this formula, he would receive less than 60 per cent of his final salary as a pension. This means a drop in income of 40 per cent before he even begins to take future inflation into account. Short service due to "job hopping" makes matters worse. Make sure, therefore, that you know what your retirement benefits will be from your pension fund.
Generally speaking, membership of a retirement fund alone is not enough and you should be investing additional funds to supplement your income during retirement.
So my message to you is: membership of a retirement fund is not enough, especially if it is likely that you will be changing jobs frequently. Then it is definitely not enough!