One of my pet annoyances is that if you are in my sphere of influence, I will always be on your face as soon as you start earning an income. I will be like, “Have you started planning your retirement?” It’s because if you are not intentional, retirement tends to creep up on you, and it is not far-fetched to get to 50 only to wonder where did the time go or even where do you start. For most us the issue is not that we lack an income, it is that we lack the right tools to structure our retirement.

Enter the  Retirement Benefits Authority Pensioners’ survey 2024  where statistics show that most of us will probably retire with a replacement income rate of below 40% . Replacement income rate is loosely described as the comparison of the last income that the retiree was earning before retirement against their current income in retirement. The globally recommended replacement rate of 70%-85%.

Retirement planning is a long game, and depending on when you start, there are a myriad of financial tools.The tools you will pick require you to keep in mind how close you are to retirement.

Let’s look at how to set ourselves up financially, so we have a relatively smooth retirement , shall we?

Investment Tools:

1. Pension Schemes

This is really the absolute baseline, the start line if you must. The minute you start earning, put yourself in a pension scheme. In Kenya, the National Social Security Fund (NSSF) is a statutory provident fund, which everyone who earns an income is required to contribute to monthly. Because it is statutory, there is really no other way other than compliance.

If you are an employee, some employers may have a pension scheme running or will have negotiated a collective arrangement with one of the private pension schemes. Usually, as a benefit, your employer may want to match your contribution, which typically will be a percentage of your salary. If you have this arrangement, grab it with both your hands; it will be a good foundation for the annuity you need at retirement.

Then there are those of us who are in employment, and the employer does not offer any additional avenue for Pension contribution other than the obligatory NSSF. In this case, you have two options: increase your NSSF contribution to an appropriate amount that you determine you need at retirement and taking into consideration the fund returns over time . This is known as a voluntary contribution.

The second option would be to join a private pension scheme as an individual. It may look a bit overwhelming, but a bit of research would help you narrow down the available options. One of the key factors to consider is that the scheme should be regulated by the Retirement Benefits Authority. And of course, the kind of growth they have been getting over time.

If you are a business owner, other than making the NSSF contributions, consider as a benefit to your employees, enlisting in a private pension scheme. Even if you don’t intend to match their contribution, allow them the choice to join the scheme.

In my mind, it is clear that with compounding, the contribution will grow to amounts that allow you to retire in dignity. The trick is to start early because then your small contributions over time have a bigger impact than larger contributions later.

2.Unit Trusts & Investment Funds

Unit Trusts and investment funds fall under the Collective Investment Schemes. In other jurisdictions, they may be referred to as mutual funds. Whatever the case, the terminology should not distract you. What is key is to understand what unit trusts can do for your retirement journey. There are various categories of unit trusts; the difference largely stems from where the funds are invested.

Take, for instance, money market funds, these are usually viewed as low risk since the funds are largely invested in fixed deposits in banks, and government securities, which are perceived to be almost risk free. I view putting money into Money market funds as dipping your toes in river water to determine the depth. It really does not give life changing returns, and sometimes you have to watch it too closely to ensure you are not at par with inflation rates. Other funds may include bond funds and fixed income funds, where asset managers invest the funds in such schemes in Corporate and Government Bonds. Consider these funds when you are close to retirement, when you are actively pursuing capital preservation, rather than capital growth.

The other asset class is equity, commodities, and REIT funds, which, as the name suggests, will have most of its funds in stocks & securities, commodities, and REITs. These funds are considered medium risk to high risk. Other names you will encounter in this category include index funds, Exchange- traded Funds (ETF).

Due to the volatile nature of equities and commodities prices, it is advisable to consider this fund in your retirement portfolio, in the medium to long term, to give room for recovery in case of dips and market crashes. So, include these finds in your portfolio if you have a runway of at least 7 to 10 years to retirement.

The new entrants in the scene, at least in Kenya, are the special funds. These are largely targeted for sophisticated investors. This is reflected in the requirement of higher-than-average minimum investment balances and the required cooling period.

Here, the investment managers invest in all kinds of financial instruments across multiple markets, which has the advantage of diversification and hopefully higher returns. As usual, with higher returns means the level of risk taken is also higher. This investment vehicle should be considered when your risk appetite allows for it; As I always emphasize ,there is simply no need to invest only to lose sleep over your choice of investment vehicle. Secondly, consider this if you have a long-term view. As always, let your financial advisor help you create a portfolio that suits your lifestyle.

3. Real Estate

This is a heavy one,

Literally, because it requires heavy capital investment. But also, so we are crystal clear real estate investment here means a cashflow-generating investment. Not the plots of land you acquire for speculation. Because retirement is all about cashflow. Illiquid assets are of no much help.

For this one, start early so that by the time you are retiring you do not have loans that you are servicing, such as mortgages or construction loans. Also, do your due diligence as you acquire property to ensure it is in a good location that will attract a good occupancy rate.

If you don’t have resources to purchase or construct real estate, the alternative is to invest in REITs, which will typically be a good source of cash flow through dividend income. REIT stocks companies will typically pay out a good percentage of profits as dividends, to their shareholders.

4. Business

If you are a business owner, this is one of the ways to grow your wealth, well into retirement. Whether it’s a cashflow-generating services or products business, this is a great way to grow your income from your share of profits.

As time to retire approaches, the key is to transition yourself out of the business, so that it does not require your input, especially since you need to be slowing down.

Also ensure that the business funding requirements are not dependent on you, personally. So that you are not strained at retirement, map this as part of your exit from being actively involved in the business.

And please, please, avoid starting new businesses at retirement because you don’t have much leeway to make mistakes. Mistakes can be catastrophic. Remember, you cannot afford to have a learning curve, as you are not assured of bouncing back.