if your PFA is your retirement plan? Think again.


So we now know that if you want to be rich, saving money in the bank isn’t the best strategy there is(this doesn’t mean saving is bad, it’s not. It’s just not the strategy the rich use in getting that way) If by any chance you’re not convinced of that fact because you didn’t read Money Smart Part 1 then just click HERE to read it. The sequel wouldn’t make as much sense if you haven’t read that one.

Now let’s look at Pension funds. Are they a good way to plan your retirement?
If you have a bolstering pension fund, does that guarantee retirement in style?
Now, if you’re one of those who’s got a pension portfolio then you’re good, you’re really good to go(that is to retirement) but are you guaranteed retirement in style?
By retirement in style I mean something similar to what we see in a typical PFA’s (pension fund administrator) TV commercial. You know, constant chilling out on the beach or some white yatch off the coast of Barcelona, reading forbes magazine in the summer sun while explaining to your grand son why he must go to school, get a great job with huge benefits like you did and end up like you; a forever cool guy with so much money at retirement from your PFAs than the rest of your life can spare. That is what I consider retiring in style and if that’s what you want, I’m afraid you have to THINK AGAIN.

Again I must say that I’m not a trained expert in these matters, just a concerned citizen willing to study these subjects and share it with friends, so if you’re one of those experts who thinks I’m talking trash, well, maybe I’m talking trash. But to the rest of you out there, my purpose isn’t to give you answers, but to give you more questions so you can start studying it yourself like I did and find your own answers.

Now what’s a pension fund?
A pension is a fixed sum to be paid regularly to a person, typically following retirement from service. The two most popular forms of pension funds are;
- Defined benefit plans and
- Defined contribution plans.

Defined benefit plans actually came first and was up till recently used mainly by government institutions and back in the days by corporate organisations because in those days people typically work in one company their entire working life. I’m aware that there are a lot of ways to calculate how much you get monthly at retirement. Usually, many plans calculate an employee’s retirement benefit by averaging the employee’s earnings during the last few years of employment (or, alternatively, averaging an employee’s earnings for his or her entire career), taking a specified percentage of the average, and then multiplying it by the employee’s number of years of service(understanding defined benefit plans)So basically at retirement you are entitled to a fraction(however big or small) of your salary when you were active.

We all know how this turned out here in nigeria, besides like I said in Money Smart Part 1, your money is losing value faster than it’s gaining numbers. So this kind of retirement is the type you see the man who had 4 drivers, 2 cooks, and a huge mansion in ikoyi(because he worked in NNPC as a director). Now, he’s still got the big house but it’s a shell. There are no cooks, some or most of the cars have been sold to take care of health expenses. But he’s still doing okay to say the least. But when do you need those cooks, at 35 when your strong or at 75 when walking to the kitchen is a chore?

The defined benefit plan is fast eroding because no government or company want to keep paying you for life, especially if you get to live longer than they expected or worse, have to pay a beneficiary when you die. So even in the USA they started looking critically into the defined contribution plan

Defined contribution plans are basically what we have around today. Your employer, you or both you and your employer set aside money monthly into a pension account with a PFA(pension fund administrator). Then after your retirement you simply get what you put in with say a little addition.
This is good, except that today when you’re perfectly healthy you get to put aside 10-15% of your salary which is matched by your employer(so that makes 30%). Remember that today, even your 100% salary doesn’t seem enough so even if you got a double digit interest on it with compound interest it might not exactly give you the kind of retirement you see in the commercials. Don’t get me wrong, you would have a good retirement, not just the kind you see in the commercials.

This contribution plan also has a little twist to it. In some cases, in the USA(I’m not so sure about Nigeria) individuals are allowed to determine where their pension fund is invested into. That’s good because the financial savvy people might double or triple their pension funds but considering that most people aren’t financial savvy, it’s a death trap because what it means is that you can lose so much money, your last salary is all you’ve got to live on the rest of your life.

What am I really saying here, get financially literate. Your financial future shouldn’t be in the hands of some PFA, employer or bank because these people really only care about one thing, their own future. When I share this information with people and they suddenly realize that salaries and pension funds aren’t enough to build a life on they usually come up to me to ask, what business should I start or where should I invest my money or I have some money saved, what do you think I should do and I say to them focus on getting financially literate first, then I can show you a more excellent way.

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