“ Retirement is the only time in your life when time no longer equals money.”
Unknown
Retirement planning is an intricate balancing act, between accurate forecasting and a bit of hope. It is not possible to forecast the future with 100% accuracy, however, with data and science, it becomes easier to imagine what the future will look like. Proper planning will allow you to enjoy retirement rather than endure it. It will allow you to live a life of dignity.
Because we don’t get a second chance for a do-over, retirement planning has to be a deliberate choice that you make at the start of your working life, otherwise, it can become mission impossible. I am convinced that there is a proper way to go about retirement planning, to achieve good returns that will sustain you when you are done with your active work life.
In Kenya, the retirement age for public officers is given as 60 years. In the private sector, I see companies allowing employees to stay up to 65 years. Of course, if you are a founder or a director this is could go all the way to 80 years.
If you are in business you need to determine, the age you would want to retire as well. Because retirement planning is for everyone.
Today we look at some of the things that could lead to you having a difficult time in retirement.
1. We delay in saving and investing for retirement:
I am convinced to have a good nest egg in retirement you will need to start investing as soon as you earn your first paycheck. Don’t roll your eyes yet, let me explain. When you start working in your early twenties, retirement may seem like it’s over a hundred years away, which is not quite accurate. What you do have is the advantage of time.
Compound interest loves time. It follows then, that if you start saving and investing at that early age, you can save a smaller amount and if you keep at it till you retire you will likely have a good nest egg. Another advantage of starting early is that as you progress in your business or career, your income will grow which as well allows you to put in more money to your retirement account
2. Putting retirement savings in very conservative investments:
When you start early you have the advantage of time, which is to say if your investment goes belly-up you have the opportunity to recover. For instance, as a twenty-year-old, I would not advise you to put your retirement savings in a fixed deposit or a savings account, their returns are quite low and yet what you require is steady growth in your retirement portfolio. It would be essential to have your investments in growth assets and then slow it down by investing in capital-preserving investments about 5-7 years to retirement.
3. Buying too many illiquid assets:
If you work and live in Kenya at one point you must have heard someone talk about buying land as a retirement planning strategy. While buying land is good, what you want to avoid is accumulating lots of pieces of land that you have no intention of developing to increase your income at retirement.
At retirement, cash is king, and if you are a serial land buyer, you may end up having to sell your land acquisitions, sometimes at prices that are lower than the market, just to sustain yourself. When buying land be intentional with what you want to do with it, especially where retirement is concerned.
4. Taking on extra financial burdens at retirement:
I’m familiar with the term “black tax”, a term that I don’t like to use, but it explains a concept that we know as a people, despite our race. It loosely means that the person in the larger extended family who makes it in life i.e. has a good income, then takes on the responsibility to take care of the rest of the family i.e. parents, brothers and sisters, uncles and aunties, etc until most of them can stand on their feet. I believe in helping your family, but not to your detriment.
As retirement draws near, it is important to start shedding extra financial burdens, especially loans. This can very easily eat into your annuity so that very little remains for use every month. As much as possible, get rid of debt and be debt free at least 2 years before your intended retirement. This gives you some breathing space and you can even continue saving and investing.
5. Waiting until retirement to start a hustle:
Businesses are great at retirement, they boost your cash flow, and keep you engaged and busy. Activity is good at retirement so that you don’t wile the time away in your thoughts that may lead to feeling frustrated. However, it is ill-advised to start a business, because other than the risk of failure being too high, the chances of sinking in and losing money are also high.
It is advisable to start your hustle at least 5 years before you retire so that you will have gone through the trial and testing period as well the learning curve will have been done with.It is even better if you can start that business much earlier so that at retirement you jump into a mature business.
6. Not factoring in increasing medical bills as part of retirement planning
As we age, our physical bodies are prone to disease, some long-term ones are acquired because of our lifestyles. Statistics have shown that medical bills tend to increase as we age. Most people argue that they have never been sick when they were younger and so taking out medical insurance is a waste of much-needed money. However, this is misguided as a lack of medical insurance could easily wipe out your resources at retirement. It is therefore prudent to have adequate medical cover, at the very least it will give you some peace of mind.
I have also found that insurance firms are reluctant to take on new entrants in their medical scheme at age 60 and above, and so my advice is at 50 if you are employed then look for a medical insurance firm that you are comfortable with and start taking their basic medical cover. When you retire you can then enhance it, to fully cover you.
7. Underestimating how much we will need to live on
To get a feel of how much money you will need at retirement, the number to watch out for is your income replacement ratio. Simply described, the income replacement ratio is how much of your current income will you need to have at retirement to maintain your current standard of living. Keeping in mind some of your current expenses will be eliminated such as transport to work, perhaps you will now be living in your house debt-free, and so on.
Experts tell us a good number to consider would be 75% of your income just before retirement. For instance, if your income is currently KES 100,000 just before you retire, then at retirement you should aim to have at least 75% of the KES 100,000, for you to maintain your current standard of living.
Most of us do not keep this number in mind, and so we end up living far below the standard of living we had before retirement. In a survey conducted by the Retirement Benefits Authority in Kenya, it was found that the Income Replacement Ratio was about 25%, which is far below what is recommended at 75%
8. Not taking advantage of Additional Voluntary Contribution (AVC)
For those in employment, you may have been enrolled into a retirement scheme through your employer where you contribute based on the scheme rules. If you are lucky the scheme could prescribe that the employer matches your contribution. So, for instance, if your contribution is Kshs.5000 then the employer could be matching this amount with an additional Kshs. 5000. Although some employers may have a cap on the amount, they can put in to match the employee’s contribution, some schemes will have some leeway to match whatever the employee puts in. Take advantage of the latter to increase your contribution, through additional voluntary contributions. It will not only accelerate the growth of your retirement pot, but you will also gain from your employers matching your contribution.
On the other hand, the National Social Security Fund (NSSF) allows for Voluntary contribution as well. so take advantage of whatever opportunity you have to invest more than the minimum required because your future self will thank you for it.
In the studies conducted by the Retirement Benefits Authority, one of the biggest regrets that retirees have is that they did not take advantage of the additional voluntary contribution.
9. Hoping that your children or government will take care of you at retirement
I have probably said this very many times but for the umpteenth time let me repeat that hope is not a strategy in investment. We are supposed to look at the data, devise a credible plan based on the data, and execute it. More and more the hope that our children will take care of us is resulting in old-age poverty and misery. The pressure of life is everywhere, and people are finding it harder and harder to make ends meet let alone support their parents.
It’s important to have a plan for yourself. The best time to have made a retirement plan would have been when you started your working life. The next best time is today, so get on it!
Retirement need not be an uncomfortable time in our lives. But we only achieve this if we have a plan and execute it. What’s your retirement plan?