Gareth Horsfall of AES International - Italy answers your personal financial questions
Q: “I recently renewed my contract with the United Nations in Rome. I have been working for 4 years and have signed another 2 year extension. I am worried about my pension benefits as I understand that the UN pension does not provide me with any retirement income until I have worked there for 5 years, and then only a small amount in retirement. Can I rely on this for my income in retirement or should I start to make some of my own savings?”
A: The United Nations pension scheme is classed as defined benefit pension scheme. This means that you can work out, at any point during your employment, the income you are likely to receive in retirement. If you have not already done so I would advise you to go to the UN Joint staff pension fund website (unjspf.org) to generate a projection of future benefits.
However, you are correct in your assumptions. The UN pension provides an income in retirement after you have completed 5 full year contributions into the scheme. If you leave before 5 years then you may receive a refund of your contributions when you leave plus interest. In effect it becomes a forced savings plan. But it does not provide any long term growth on the funds which is vital. More on this later! In your case you are going to exceed the 5 years mark and therefore will start to accumulate some benefits at the scheme retirement age of 62.
The problem in your situation is that the UN pension rewards those who contribute to the scheme for many years, with healthy pension incomes, but you need to be employed and contribute to the scheme for many years (full benefits are generally available after 30-35 years service). If your employment is on a contractual basis and there is a possibility that you may leave the UN system after 6 years then it is highly unlikely that the UN pension scheme will provide you with the income level you require in retirement.
A common rule of thumb is to take the number of years you have contributed to the pension scheme, multiply this figure by a factor of 1.7 and this gives you the percentage of your current income that you could expect to receive at retirement age, in todays’ money.
No of years contributed: 6 years
Current pensionable income: $80000 per annum
6 yrs x 1.7 = 10.2%
10.2% of your present income $80000 = $8160 per annum at age 62
(This is a general rule of thumb and you will find that it over estimates the calculation for those who have contributed to the system for a few years and equally underestimates the calculation for those who have contributed to the system for many years.)
However, as you can see, with only 6 years contributions it will provide only a fraction of your income requirements in retirement. Assuming you require more than $ 8160pa in todays money.
Once you have made this calculation you need to calculate the level of income you would like in retirement (do you want to maintain your current standard of living of $ 80000, less or more?) and calculate your current projected income. (A shortfall analysis).
This is where most people become confused and cannot think that far in the future. But it is vital that you plan now for that date, even if things change along the way. Your main consideration must be, what do you want to do in retirement? Travel regularly, golf, gardening, buy presents for your children and or grandchildren, assist children/grandchildren with education costs or money to buy a house, run a business, maintain 2 homes, maintain 2 homes in different countries, replace your car every 3 years ….and the list goes on? The common denominator for all these things is MONEY. If you haven’t got it, then how many of those items do you want to, or will you have to, forego?
In recent surveys conducted in Europe, 48% of people do not know what their expected income in retirement will be. A good start is to look on an internet based pension’s calculator (a good one to use is www.thisismoney.co.uk/pension-pot-calculator) or speak with an Independent Financial Adviser who can help you through the thought process and calculate the figures .
Once you have taken these first steps then you will have a clearer idea about what you want, and what you have. It is rare to find anyone without a shortfall, in fact most people have been saving less and less towards their retirement over the last 10 years. In 2009, 58% of people surveyed in the UK were found to be contributing too little to provide them with the income that they expected to receive in retirement. Most of these people had never calculated their expected retirement income.
In addition, it is worth a quick mention of Government benefits in retirement. We often hear the statement – “well the Government will look after me”! Governments in the West, particularly, are now highly indebted and are unlikely to be able to fund the large pension shortfall for individuals that are looming in the not too distant future. They have little choice but to either increase the retirement age (as we have seen in Australia, Germany, Spain, and soon to be the UK) and/or reduce benefits. Government benefits should really be considered as a supplementary income source, not your main source.
Even as an International worker you may no longer be contributing to your home country state pension or your adopted country state pension and therefore have a funding gap in your state pension benefits as well.
So what to do?
Well, most people in your situation would be advised to start a complementary retirement/savings plan if you do not have one. Of course you need to take into account the type of plan that is good for you, your short term cash requirements and any other financial objectives that you may have. It is generally considered good advice to invest retirement plan savings over the medium to long term and therefore you need to consider your tolerance to investment volatility. It would not be good psychologically for you if you saw your retirement fund drop by 50% if you are naturally a cautious investor. However the long term benefits of investment are far outweighed by any short term falls in markets.
There are 2 ways to generate money in the future, the first is to put your own labour power to work and use your physical self to create money through work. The second is to put your capital/savings to work for you so that you don’t have to work. Which option would you like to be taking at age 62 or 65? The affluent of society understand this and apply rule 2 where possible.
You should also review your retirement plans regularly, and your shortfall, to see if you are meeting your expectations. We often see people starting retirement plans and not reviewing them for 10 years or longer. This is one of the most important financial decisions of your life and therefore you should review your situation once a year to make sure you are on track.
Would you plant a fruit tree then not feed it, water it, or prune it, for 10 years? If you did the fruit yield would likely be very low and the quality of the plant and fruit very bad. Plant the seed early, love it and take care of it and it will take care of you. Your retirement plan is the tree which will provide you with your food in old age!
When you are within 10 years of your intended retirement date you are applying damage limitation if you have not started to save. So start savings as early as you can. For someone who has 25 years until retirement, the first 5 years of these contributions into a retirement plan will contribute to over 50% of the fund at retirement age. We cannot stress how important it is to start early.
And lastly, always remember that you must find the right balance between saving for the future and living now. As my Grandmother used to say “save a bit and spend a bit and you will be fine”.
Good luck !!