Personal FinanceRetirement Planning

Retirement Planning: Achieve Financial Security

4 Mins read


In a country where open economic system and free markets are thriving, achieving an independent and secure financial future is within reach of most people who are employed and have a steady income. It is important for every individual to plan for retirement and start setting aside part of ones income as early in their careers as possible. What is thereafter critical is to see to it that these funds are properly invested in financial or real assets, which comfortably yield far in excess of forecast inflation.

As a good starting point in achieving long term financial stability, one can study ones monthly income and expenses (ie. Budget) to determine what portion of income can be saved and invested. Income can usually be utilized in three broad areas: consumption, saving/investment, charitable giving. With a little discipline and effort, consumption should be reduced and savings must be enhanced.

To achieve financial independence and freedom in later years of ones’ life, one can start the process by adhering to a few principles listed below:

  • Make financial security a priority
  • Supplement income where possible
  • Spend less than one earns 
  • Save and invest regularly and wisely 
  • Use right kind of debt/loans financing
  • Commit to owning a home or a piece of land

Most professionals and workers in the formal sector in Sri Lanka participate in the state sponsored retirement schemes ETF & EPF. This portion of one’s savings along with the employers contributions adds up to approximately 20% to 25% of ones gross salary. This may be adequate for a comfortable retirement provided these funds are invested in assets, which gives annualized returns of over 20%. However, the average annual returns, accrued to ETF & EPF funds which are mainly invested in government T-Bonds and T-Bills for safety reasons, falls below such required returns. As a result, reliance on EPF & ETF Savings alone will be grossly inadequate for an individual to secure a comfortable retirement.  In addition, there are also those who are self employed and in the informal sectors who do not participate in compulsory retirement schemes.

Inflation, Returns and Investment Options

In Sri Lanka average annual inflation has hovered around low teens for the last 25 years. It is reasonable to expect inflation to continue at somewhat lower but significant rate of about 8-10% for the foreseeable future.

What are the investment vehicles available for an investor?

  • Land – The least risk and best hedge against inflation. However, usually large investments are required and liquidity may be at times difficult. 
  • House/Building – May retain value due to escalation in construction costs over time but require maintenance, renovation etc.,
  • Equity  – The ownership of equity in listed companies with good corporate governance has given decent analyzed returns over long periods (15-20 years) regardless of short-term price fluctuations in the market.
  • Those who have a dollar income may hold part of their savings in dollars (NRFC & RFC accounts).
  • Precious metals and Stones – (Gold, Silver, Gems/Diamonds)

It is necessary to mention here that Vehicles may retain its value during certain periods due to depreciation of the Rupee against Yen and other world currencies. However, they are NOT assets which should be considered as investments. They should be considered consumption items whose maintenance costs are high and they depreciate in value over time.

Compounding Effect

It is encouraging to understand and appreciate the potential of compounding effect on investments over long periods of time and how the right investment decisions made today can bring you financial security in the future. A 5% difference in annualized returns make a huge difference to the amount your investment will grow to over 25 years because of the compounding effect. Consider the following table on growth of Rs. 1000 over 25 years.

Inflation / InvestmentForecast Annualized Average  Rates of ReturnWhat Rs. 1000 would be worth (cost to buy) in 25 years
Inflation (Forecast) 8%- 10% Rs.6,848 – 10,835
Inflation (Historical)12%Rs. 17,000
T Bills/Deposits (Historical)14% (No Default Risk)Rs. 26,462
Stock Market Index (Historical)20- 22% (excluding dividends)Rs 95,396 – 150,000
Land/Selected Equity Investments24-30%Rs. 216,542 – 705,641

As one can see from the table, while a basket of goods and services cost Rs. 1000 today could escalate to Rs. 10,835 in 25 years, the right investment can potentially appreciate up to Rs. 705,641. 

Note : It is important to caution that above figures are based on past returns extrapolated (forecast) to the future. The risk of same past returns not materializing in the future (especially in the case of equity investments) is a distinct possibility. Investment in land is considered less risky than investment in equity. However, most investments carry some form of risk.

What are the right kind of debt/ loans?

As an integral part of an investment strategy, it may be necessary to borrow especially to purchase big-ticket items like houses and other properties. Debt must be however taken on with caution. How does one borrow wisely?

  • Seek out the lowest cost lender with best terms
  • Avoid or minimize borrowing to finance consumption (ex. Lease finance for vehicles)
  • Invest in land/home/property on mortgage loan borrowing
  • Do not leave credit card balances and pay high interest (usually over 26% p.a.)

Basically, any barrowing to fund a good investment, which has the potential to yield high returns, is acceptable borrowing as long as one can comfortably service the loan (pay interest and capital repayment) from his/her monthly income. However, the risk of expected returns not materializing must be born in mind. The other risk of taking on debt is that ones income may drop or expenses go up making one unable to service the debt. Borrowing to purchase a vehicle is not a good investment decision.

Concluding Remarks

Everyone has within their grasp the means to secure a solid financial future for themselves, if one is able to save and invest out of their income/earnings on a regular basis starting early in life. The regular savings must then be channeled into sound investment. Investments which give superior annual returns when compounded over 25 years or more gives the investor a substantial capital base to secure his or her retirement on. The goal is to stay ahead of inflation by a comfortable margin so your investments will grow to a level that can support your lifestyle and expenses in your retirement.

Cover Photo by cottonbro from Pexels

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Masters in Business Administration (MBA) with a concentration in International Business and Economics from University of Texas, Arlington, U.S.A., December 1994 | Bachelor of Science Degree in Business Administration with a major in Management from Hawaii Pacific University, Honolulu, Hawaii, 1991 | Certificate in Modern European Languages (German, French, English) from the Swiss School of Tourism, 1981 | Worked in the senior management at the Secretariat of the Securities and Exchange Commission of Sri Lanka (SEC) from September 2005 to February 2013 mainly as Director Surveillance and as an Equity Portfolio Manager at DFCC Bank and in the Seychelles | Currently retired from full time work but engaged in making Investments and Trading in Real Estate and at the Colombo Stock Exchange. Managing Director at Ethena Home Investments Ltd.. Also engaged in advisory work on Business Feasibility, Capital Restructuring, Investment Management etc.
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