“ The question isn’t at what age I want to retire, it’s at what income.”
As with most things in life, you must have a plan for the retirement you want. It will not just happen, and neither is it someone else’s responsibility like the government or your children. As you let that sink in let me give you a few statistics, to try and convince you to be intentional about your retirement plans.
How much to save in your retirement account
Personal financial experts largely agree that we need to save at least 15% of our annual pre-tax income. For most people, this will also translate to still to 15% of their monthly income.
How much should you have in retirement at age 30,40,50 and 60
Investopedia gives a general guide; at 30 years you should have 1X i.e. an amount equivalent to your annual salary in retirement savings. At 40 years it should be 3X, at 50 years, 6X and at 60 years it should be at 8X.
What is the income replacement ratio in Kenya?
According to a study conducted by the Retirement Benefits Authority in 2004, pension funds were replacing only 20% of the income a pensioner was earning before retiring. This is far lower than the recommended ratio of 75%.
At Retirement, How much should you withdraw annually from your annuity?
The sustainable, withdrawal rate from a pension fund is recommended at 4% of the pension savings. This is guided by the projection of 30 years of retirement.
So what should you do to get ready for retirement?
There are many moving parts in retirement planning and all these parts must move in harmony with each other. Apart from contributing to your chosen pension fund , there are some things you can do to get yourself ready for retirement . This is my simple checklist to guide you on whether you are retirement-ready.
1.. Emergency Fund
At retirement, you should be confident that you have an emergency fund. As the name suggests the fund assists cover unexpected expenses. I would usually recommend the emergency fund covers between 6 -9 months of your living expenses.
I call it the peace of mind fund and it is so critical in retirement. I would advise that at retirement, your emergency fund should be bumped up to 12 months of living expense because of the new territory you will be in a bit of uncertainty.
2. What is your projected housing arrangement at retirement?
You need to determine from the minute you start earning an income whether you want to own your own home or you would want to continue renting even after retirement.
Some people prefer to rent where they work and move upcountry at retirement. In which case, a retirement home in the village will be required. While some who would want to retire in the city, or earn a rental income at retirement, will take a mortgage/ other loan and pay for their homes through their working lives.
Either option depends on you and your circumstances but it has to be a decision that you make early in your working life.
3. What are /will be your social /living arrangements?
If you determine that you will be retiring to the village, while you currently work in an urban area then you need to bank some “social capital” to enable you to fit into the village life at retirement.
Simply put you need to integrate yourself early enough with the village culture and your neighbors, so that at retirement you continue as a part of them. This is important because you do not want to live in a place where you are a stranger. At retirement, it will be tough to start making new friends and form new connections.
As early as possible:
- Visit regularly and interact especially with the area leaders.
- Be involved in discussions about development and contribute materially and in kind.
- Know your immediate neighbors well.
4. What expenses will you have at retirement?
You need to know what your normal living expenses will be. One of the large expenses at retirement is usual medical bills.
It’s important to determine if you will still have dependents, and for how long into retirement will you need to be supporting them. Will you still be paying school fees? You need to have sight of all these expenses beforehand.
5. What sources of income will you have at retirement?
Are you actively saving in pension or provident scheme? For the amount to be significant you need to start as early into employment as you can. Also as we have earlier seen, the income replacement ratio from pension funds is not usually sufficient to tide you over in retirement.
It is, therefore, necessary to think of building assets and investments that will supplement your income, from the pension schemes. If you are not in business think about starting one now not at retirement. If you can afford to get into commercial farming and building rental units do so. Start small, repetition helps in growing into a snowball.
6. What do you want to do at retirement?
You need to be clear about what will occupy your time during retirement. Do you want to be a volunteer and help nurture others, by sitting on boards, teaching?
Will you work on a part-time basis say as a consultant?
Will continue your business full throttle.Do you think you want to spend most of your time traveling and discovering new and exciting people, places, and cultures?
All the choices have a bearing on how much you should have in your retirement nest egg.
What you do not want to do is to retire without a plan, and hope people will make time for you. It may be a recipe for depression. You need to plan because it will help you easily adjust.
Retirement usually looks like a far-off eventuality but it helps to start early, start small even, but just start and await the compound effect on your money. In Swahili we say “Haba na haba hujaza kibaba”, loosely translated it means little by little fills the water pot.
An interesting take-away from the Retirement Benefits Authority Survey 2019 is that some pensioners wished they knew early that they could increase their contributions voluntarily, which would boost their retirement nest egg. You may want to consider increasing your contributions even to the National Social Security Fund (NSSF), because, it does add up!