By Munachino Obinna Eze
There is a popular misconception about saving for the future, particularly through pension schemes. Those who save for the future start to count their lose at the point of making those savings giving a number of factors, hence, it is a wise decision to rather invest for the future.
According to a real estate investment Analyst, Munachino Obinna Eze this article is to enlighten Nigerians on finance and value of money saved or sometimes invested.
“I will start this article by talking about pension savings, how it works, its stated benefits and the negative part which you are yet to be informed about. Even though I don’t like talking about the negative aspect of a subject, on the contrary, it is important to make smart decisions. More certainly, there is always a light at the end of the tunnel.
As people develop through their lifetime they have an expectation that a time will come when they will have to retire. For some people, pension is sufficient to provide a basic level of income.
Results from research studies revealed that complete retirement leads to a 5-16 percent increase in difficulties associated with mobility and daily activities, a 5-6 percent in- crease in illness conditions, and 6-9 percent decline in mental health, over an average post-retirement period of six years”.
Eze said that it is expected that when people retire they will experience a reduction in income – a pension makes up for some of this loss of income upon retirement. “Pension schemes can provide protection in the form of lump sums for the pensioner or to his/her dependants in the event of death. In order to encourage pension schemes, governments provides tax relief on contributions made to pension schemes and the growth in their investments.
Pension savings may lead to deeper and more efficient capital markets. Pension savings directly increase funds in capital markets available for private investment. In addition, deeper capital markets may lead to better allocation of capital, thereby improving overall efficiency and economic growth”.
Continuing he said, “although these are some of the reasons and benefits of subscribing to pension plans. On the contrary, there are other things that you are not told. This is why at Muna Real Estate, our mission is your prosperity. We implore people to make wise investment decisions at earlier stages of their lives so as to avoid the huge mistakes most people do not even realize they are making and continue to make. We will review a few things: Control, Inflation and Depreciation.
Control – Given that your pension will be invested in stocks and shares, there will be a fair bit of risk involved. Of course, if your pension investments do perform terribly for a while, the good news is that if you’re still far off retirement, there’s plenty of time for those investments to bounce back. What’s more, you will be able to acquire more shares for your money in a falling market. So, this may work to your advantage, but if you are approaching retirement and your pension scheme is performing badly, it can be extremely worrisome.
That said, most pension schemes use ‘life styling’ – a process where your pension money is automatically moved out of shares and into a lower risk investment such as fixed interest bonds and/or cash as you come closer to retirement age.
One of the biggest fears is also misappropriation of funds and terrible investment decisions made by those who control or have access to pension funds. The big question is: do you have control over this pension fund? The sad answer is NO.
Inflation on the other hand increases the price of goods and services over time, effectively de- creasing the number of goods and services you can buy with money in the future as opposed to that same amount of money today.
If your earnings remain the same but inflation causes the prices of goods and services to increase over time, it will take a larger percentage of your income to purchase the same good or service in the future.
So, for example, if an apple costs $1 today, it is possible that it could cost $2 for the same apple one year from today. This effectively decreases the time value of money, since it will cost twice as much to purchase the same product in the future. To mitigate this decrease in the time value of money, you can invest the money available to you today at a rate equal to or higher than the rate of inflation.
Another big question is: the annual interest on pension, is it higher or lower than the annual inflation in the market? The sad answer is NO. We will now take a look at time value of money and see how Depreciation sneaks into the equation.
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There is the depreciation of cash saved due to the opportunity costs associated to the wait period and also due to inflation. There is also depreciation of currency – currency depreciation is the loss of value of a country’s currency with respect to one or more foreign reference currencies, typically in a floating ex- change rate system in which no official currency value is maintained.
We will now talk about the role of the time value of money in the whole game. The time value of money is the concept that money you have now is worth more than its incremental face value in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. Contrary to this principle pension lasts for more than 20 to 30 years and pays averagely 2 percent interest while inflation is well above 12 percent annually.
We will now analyse this in a simple arithmetic explanation: if you save $100, you earn $2, giving a total of $102 in one year. On the contrary, you lose $12 due to inflation effect in the economy, leaving you with $90. Even though what you see is $102, however, the actual value is $90.
The time value of money draws from the idea that rational investors prefer to receive money today rather than the same amount of money or slightly higher in the future because of money’s potential to grow in value over a given period of time. For example, money deposited into a savings account earns a certain interest rate and is therefore said to be compounding in value.
Further illustrating the rational investor’s preference, assume you have the option to choose between receiving $100,000 now versus
$110,000 in two years. It’s reason- able to assume most people would choose the first option. Despite the increase in value at the time of disbursement, receiving the $100,000 today has more value and utility to the beneficiary than receiving a
$110,000 in the future due to the opportunity costs associated with the wait.
Such opportunity costs could include the potential gain on inter- est where that money is received today and held in a savings account for two years.
So, the big question for this section is: does money saved depreciate? The sad answer is YES. The wise decision is to consider alternative investments you can go for instead of pension funds, like rental proper- ties that provide positive cashflow. It is very important that investors and young people understand that there is positive and negative cashflow—you might have positive cashflow but in terms of the value of the cash, you might actually be in a negative cashflow. The light at the end of the tunnel is IPPP (International Property Pension Plan) for you and for your family’s future.
Munachino Obinna Eze is a real estate investment analyst with a track record of multiple property investments for clients and himself in various countries, He has a back- ground in investment management, investment banking, financial analysis, valuation and modelling, just to mention a few.