My name is Felix Ochieng and my average income from my day job and side hustle is Sh100,000 per month. I just turned 30 and I really want to ensure that I do not retire poor but still live a good life, meet my needs and some of my wants. How can I plan to save or invest for when I turn 50 on my income?
Rose Ellah Ngari
Founder and CEO, Vasili Africa
The best time for you to start saving for retirement is the moment you earn your first income; usually in your 20s. However, life often gets in the way and many people are only able to begin saving later in their careers, when their income is a little more stable.
The disadvantage of this approach is that they are years behind those who started their retirement funds much earlier. In addition, even though people in their 40s and 50s tend to have a larger disposable income, they are also likely to have more financial obligations, reducing the amount they can set aside for a pension.
What should a middle-aged person who has just started saving for a comfortable retirement do to maximise their earnings? According to Fidelity, the rule of thumb is that you should aim to save at least equivalent of your salary by 30, three times by 40, six times by 50, eight times by 60 and 10 times by 67, every year.
However, saving for retirement is not a one-size-fits-all and it is important that your savings and goals connect to your lifestyle. This calls for a consideration of your income versus your expenditure; that is, your budget.
While budgeting, try using the following formula: With gross earnings of about Sh100,000 per month, you only have to budget with about Sh65,000 after tax and statutory deductions. Up and above what you have contributed for social security (NSSF), which is barely enough to last you through your retirement years, budget for at least five to 10 per cent of your take-home income to save for retirement.
One can begin by saving monthly in a recognised pension scheme. This will allow them to capitalise on the tax reliefs that the government offers. Moreover, limited access to pension savings ensures that the fund is not depleted before its owner actually retires, guaranteeing them a source of income when they are no longer working.
Those who are employed have the added benefit of their employer matching their contributions.
Second, you should work aggressively towards getting rid of debt. Repayments plus the interest on uncleared debt can impede saving over the long term. The quicker it is eliminated, the more disposable income can be freed up and channeled towards a retirement fund.
Third, adding high-interest earning investments to your portfolio will optimise retirement earnings. Through this and the magic of compounding interest, you will be able to hit your savings targets much sooner.
Say, for example, you want to have saved Sh10 million by the time you retire and you contribute Sh6,000 each month. It will take you 38 years to reach this goal if your retirement savings earn an average of six per cent per year.
However, if the return was 12 per cent per year you would achieve this goal in 25 years. The latter is much more preferable for someone in their 40s or 50s. A financial advisor can suggest an appropriate asset mix to minimise risk and maximise returns.
A late start does not mean it is impossible to save for retirement later in life. By saving diligently through a recognised scheme, eliminating debt aggressively and chasing high-interest investments, you can catch up quickly and be able to afford the kind of post-retirement lifestyle you want.
Business Development Manager, ICEA Lion Life Assurance
For one to live the kind of future that they desire in retirement, there must be deliberate efforts towards creating the same. This calls for personal discipline in planning and setting goals on how much to invest regularly, the kind of investment vehicles to use, period to retirement, expected returns and target retirement amounts, among others.
‘Always pay yourself first out of any income received’ should be the guiding philosophy for anyone who desires to escape retirement poverty. But beyond financial goals, one must also plan for housing, medical, social and psychological engagements or activities in retirement for a wholesome experience.
Unfortunately, majority of Kenyans are yet to embrace retirement planning. Most workers in formal employment have either NSSF or private schemes but the vast majority in the informal sector have no form of savings for retirement, largely due to lack of information on retirement planning.
The rule of thumb is to target at least 70 per cent of pre-retirement income as retirement income. This means that if your last pay is Sh100,000 then post-retirement income should be around Sh70,000.
Depending on age and years to retirement, one should always invest at least 10 per cent of their income towards retirement. So, it all depends on individual circumstances. It is good to sit down with a financial advisor to discuss the details.
However, it is better late than never when it comes to planning for retirement. Those who start late may need to supplement their savings through additional voluntary contributions if they are within a scheme set up by the employer. For those in self-employment, you try to save more. It is also good to identify other personal assets and designate or ring-fence them for supplemental income in retirement. This is the reason why one should always have a nest egg for bad days.
If you are changing jobs and have retirement savings, it is always advisable to consolidate savings rather than accessing the same. Retirement savings are long-term and should not be converted to meet short-term needs unless it is an extreme emergency.
It is always wise to take advantage of the present opportunities to save as much as possible, so even in a tough and unpredictable environment such as now, being frugal in finance helps.
The more streams of income one has in retirement the better. Retirement schemes offer a risk-free avenue for investing that should be considered side by side. Always have a balanced investment portfolio to serve different objectives.
For long-term savings objectives, retirement schemes offer the best value on safety of the funds, returns and tax incentives.