I pulled my pension money. Now what?
What follows is not investment or financial advice. Unless you are a client of mine, I don’t know what your life looks like, I don’t know what is important to you and your family, and I don’t know what you are trying to achieve with your money.
What I do know is that there are an awful lot of people in Cayman (and elsewhere) who have been given access to money that is supposed to be for their retirement, and it’s now sitting in a bank account. If you are in the fortunate situation of not being directly impacted by the current crisis you may find yourself pondering what to do with it. If you are in that situation and your Cayman pension is likely to form a large part of your retirement assets, this article is for you.
Before I get onto some of your options, let’s just remind ourselves why we have a pension in the first place.
At some point in life we can’t or don’t want to work anymore. The idea is that we work when we are young and put aside money so that we don’t have to work when we are old. During our career we generate an income from work. When we stop working, we have to generate an income from our investments.
This is a simple concept. Difficult in practice.
Difficult because we humans are not very good at looking out decades. The temptation is always to live in today, because, well, we do live in today. Human nature means we tell ourselves things like; I might get run over by a bus tomorrow; I have bills to pay now; I am young, I will save later; I don’t want my money locked up because I might need it; I don’t trust pension providers anyhow; property will be my pension.
Sounds familiar?
That’s why we have a pension and why our money is locked up until retirement. The majority of people, if left to their own devices, would get there with not very much to show for it. In Cayman this concept is particularly important because we have no other safety nets – there is no social security, or state pension. We are truly left on our own in retirement.
And as I always say, retirement is one of those things that you only really get one shot at. You don’t get the luxury of being able to say at 60 or 65 or 70 ‘oops, I didn’t take that very seriously, let me go back and try again.’ It’s a bit late by then.
So, if we accept that it’s simple in concept but difficult in practice, what do we do if we made the decision to pull more than a quarter of our currently saved pension funds?
Here are some of the options, with my general thoughts on each.
Pay off some of your mortgage – I don’t hate this idea but I don’t love it either.
It beats 7 (everything beats 7) but the problem is that you have taken money out of a vehicle that is going to generate you an income in retirement and put it into something that is not going to generate you an income in retirement. Your house doesn’t by itself generate an income. You are also taking money out of an asset class that compounds over time and put it into something that doesn’t compound. If you opt to do this, you are going to have to play catch-up at some point and the longer you leave it the greater the catch-up. Resolving to take your mortgage payments and add them to your pension as voluntary contributions once you clear your mortgage will help, but it probably won’t fill the gap in its entirety.
Pay off other high interest rate debt (credit cards, car loans, other personal loans) – in theory this can look like a good idea because the interest rate on your credit card or car loan is probably higher than the return you are getting on your pension money.
There is a behavioural element to this. If you clear your debt with your pension withdrawal and take what you were paying each month to service the debt and put it into your pension as additional contributions, you will likely be better off when you retire. The big question is, will you do this?
The other thing to think about here is that, often when people have built up significant credit card debt or personal loans, there is an underlying cash flow problem. If you don’t fix the underlying problem (not enough coming in and too much going out over time) you will end up back in credit card or other debt. Taking control of your monthly cash flow and building up a cash reserve to pay for the unexpected expenses is key.
Get on the housing ladder – if you don’t already own a home, pulling money out of the pension for a deposit can seem attractive, particularly if you are young. Caymanians have been able to do this for a while, but the COVID withdrawal opens this option to others.
This, like option 1 bothers me. It bothers me because it confuses two problems. A pension solves the retirement problem (or it should). Getting young people on the housing ladder is a separate problem. If we try and solve that with pension withdrawals we, well, it’s obvious…we ruin people’s retirement.
The other problem with this is the transaction costs involved in buying a house. In Cayman, those costs are between 8%-9.5% (stamp duty is 7.5%) if you are not a Caymanian first-time buyer. This is a huge figure and it’s part of the reason why I always challenge people who think of property as a ‘no-brainer’. So, what you are actually doing is pulling from your retirement account to pay a whole bunch of fees.
Buy a rental property – on top of the issues with 3 this one worries me for a few other reasons.
Firstly, there is a temptation to run out and buy a rental property without thinking through the affordability. A down-payment is just the first step. You also need to make sure you can afford that property when things go wrong – the a/c system breaks, the roof leaks, the dishwasher breaks down, as well as when you don’t have a tenant. Rental income is great when it’s coming in, but it’s not guaranteed (far from guaranteed in this current environment). Can you cover the mortgage if you have a few months (or longer) with no tenant?
My recommendation is that before you rush into buying a rental property you ensure you have a contingency fund to cover expenses, and your monthly cash flow has enough flex in it that it can cover the mortgage if it needs to. Remember, property can be an investment but it can also turn into a liability very quickly.
The other consideration here is that you have taken money out of a portfolio that is spread across different asset classes and diversified across the globe and put it into one investment that you are betting on doing well. One of the most important rules of personal finance is ‘don’t put all your eggs in one basket’. If your income is tied to the Cayman economy and you already own a primary residence here, pulling from a global portfolio to add to Cayman will probably leave you very over-exposed to this little island.
There are such things as housing market crashes – Cayman is not immune (I know we all think it is). Property is also illiquid meaning that if you need the money in a hurry you may be forced to sell at a loss.
Invest it yourself in the stock markets – if you have some experience in investing and are able to keep your own behaviour under control, it’s hard to argue against this. Interactive Brokers is the easiest investing platform for someone in Cayman to open an account. If you buy a couple of global index funds and hold them until retirement, you will be in good shape. The problem here is the ‘holding until retirement’ bit. That requires discipline and patience. And let me tell you a little secret – us humans aren’t very good at either of those things. But, if you really think you can do it – leave it there, untouched for a few decades – I say, do it.
Find a financial advisor to help you – ok, it’s hard for me to answer this one without being a little bit biased! If you find yourself a real financial advisor (one that understands you and your values, and is not driven by commissions), you will probably do better working with her/him than if you take option 5.
But I do have a word of caution here. The conditions today are ripe for fraud. There is a lot of money sloshing around, and this is when people get scammed and taken advantage of. This is your retirement – it’s really important. If you are going to trust your money to someone, please please do your due diligence. Ask around. I always joke that people do more research on what TV they are going to buy than they do on whom to trust with their hard-earned money. It’s not really a joke though is it?
Obviously, if you are reading this, you can find my email address (at the bottom of this article) and drop me a line if you want to chat. My rule is that every single person gets to find out exactly what I do and how I can help them before they pay me a single dollar. Spend some time looking at my website and if it seems as though there might be a fit, email me.
Spend it on a new car, a new boat, a trip, or any other shiny object – I mean, I don’t really need to write anything here, do I?
Put it back into the pension as a voluntary contribution – I like this idea. The Cayman pension law is quite prescriptive over how your mandatory contributions are invested. Unfortunately, they follow the traditional finance rule that says that as you get older the proportion of your portfolio that is made up of equities must fall and the proportion of your portfolio that is made up of bonds must rise.
Equities are stocks and shares – when you own an equity, you own a little piece of a business. Equities give an amazing long-term return but you have to go through a tonne of volatility. I have written endlessly about this. Volatility is not risk – risk is running out of money before you die, or losing it all by putting it in one speculative investment. Volatility gives us the return.
If you can’t take the volatility, you can own bonds (or fixed income – same thing). When you buy a bond you have loaned money to an entity – normally a Government or a company. In return you get a fixed return in the form of interest, and less volatility. But the return has historically been orders of magnitude lower than that of equities.
So, all other things being equal, the more bonds you own, the lower your return, and the less money you will have when you retire. See my video below for more on this.
The advantage of putting money back into the pension plan as a voluntary contribution is two-fold. One, you get to direct the money into the portfolio that you choose (see video) – you can therefore opt to own more equities, and, if history is a guide, retire with a bigger pension pot. The second advantage is that when you retire you can take all your voluntary contributions as a lump-sum. The mandatory contributions are subject to the government drawdown schedule. This means you can only withdraw a percentage of your pension fund each year – the idea being that if you withdraw too much at the start you run the risk of running out before you die.
Buy CUC shares – this doesn’t make any sense to me. If you pull from the pension plan, you are, like I explained in 4, taking money from a diversified portfolio. The last thing you want to do is put it all into one (very small, and therefore very risky) company. I know it seems safe, but that’s psychological bias at play. I am not saying don’t own any CUC (although I wouldn’t personally*), but no individual stock should ever account for much more than 5% of your net worth.
I am sure there are other things you could do with it (bet it all on bitcoin, gold or something else) but if I haven’t covered it, you can assume I don’t think it’s a great plan.
Here’s my last thought on this. I know many people are very negative on the performance of the Cayman pension plans. I made a video to help you navigate the performance figures. I hope this helps.
As always, you know where I am. Reach out if you need me.
Georgie
georgie@libertywealth.ky
*unless I was doing it for PR reasons. If you didn’t know - an investment in CUC counts towards your PR in the same way as owning a property does.
Please note that Liberty Wealth has no affiliation or relationship with any Cayman pension fund.