Many are the times you are encouraged to invest for a secure, comfortable, and stress-free future, no matter how much your salary is. The question is, have you saved for your retirement?
You may put off saving for another day but wouldn’t you like to enjoy the same level of financial security that you were enjoying even in your golden years?
It only takes planning, commitment, and discipline to achieve financial security in retirement.
Use the below steps to plan for a comfortable life after retirement.
Steps to Retirement Planning
1. Information
Gather relevant information to make an informed decision. Do your due diligence and seek advice from financial experts. While at it, find out the best age to start saving for retirement.
People who are employed can request their employer to organize formal training.
2. Set Goals
How much would you like to receive every month after you retire? You need to maintain your living standard and also meet your expenses.
For this, you must consider your income and expenses. How much can you comfortably save from your salary without neglecting your other financial goals?
Cut on unnecessary expenses such as too much entertainment or dining out.
3. Choose the Best Retirement Plan
The ultimate goal of financial planning is not only how much you can save but also where to save.
If you work in the formal sector, you probably have a workplace retirement plan but if you are self-employed you can open a personal retirement plan.
4. Start Saving
The best step you can ever take is to start saving. The reward is always good when you save for retirement or any other goal consistently.
It’s advisable to start saving for retirement the moment you start earning.
When in your 20s, you’ve one precious thing that older people wish for: time. With time, you can build a sizable investment because you enjoy “the power of compound interest”
Remember, investing in your 20s is not the same as investing in your 30s or 40s. The longer you delay saving for retirement, the more money you’ll be required to save every month.
Read on to find out the types of retirement plans available in Kenya.
Investment Plans Available for Pension
There are various pension schemes in Kenya registered by the Retirement Benefits Authority that can help you save for retirement.
1. Occupational Pension Schemes
In these schemes, only the employee of a particular employer can join. The employees contribute part of their salary to the scheme but once they leave the employer, they can longer contribute.
The pension benefits accrued remain in the scheme. The employee can transfer the benefits to another pension scheme or retain the benefits in that particular employer’s pension scheme.
Both the employee’s and employer’s contributions are fixed depending on the percentage of pensionable earnings. On the other hand, members can pay more than the required amount—additional voluntary contributions.
2. Umbrella Pension Schemes
Some organizations find the process of running a stand-alone scheme costly and tedious as it requires complying with complex legal demands and too much administrative work.
To avoid the hassle, such organizations prefer to join an umbrella pension scheme.
“An umbrella pension scheme is an arrangement whereby an independent company (mostly a regulated financial company like a Fund Manager) provides retirement benefits to members of different participating companies.”
The retirement contributions are invested collectively as one fund, as a result, both the employees and employer enjoy the benefits of pooled funds.
3. Individual Pension Plan (IPP)
An IPP is a pension that is typically set up for those who are self-employed or employees in organizations that do not operate occupational pension schemes.
Why Is It Important to Save for Retirement?
Some of the benefits of saving for retirement are:
1. Financial Security
Upon retirement, you’ll no longer receive an income from your employer. Therefore, the investments you make towards your retirement will come in handy.
Retirement savings ensure that you remain independent. You’ll have an income stream to meet your expenses. Hence, you will not rely on your children or friends for survival.
2. Compound Interest
Small contributions made consistently at an early age multiply over the years because of “The power of compound interest”. Your money grows exponentially since the interest keeps building upon itself gradually.
So, the sooner you invest, the easier it’ll be to achieve your financial goal.
3. Guarantee on Returns
You invest your money with the hope that in the future, you will receive more than what you invested.
Many retirement plans guarantee returns on your investments. In Kenya, retirement schemes earn an average rate of around 8-10%.
4. Tax Benefits
The government of Kenya gives tax breaks to those who contribute towards a retirement scheme. You are entitled to tax relief of up to Ksh 20,000 before your salary is taxed.
For example, if you earn Ksh 100,000 and contribute Ksh 20,000 to a retirement scheme, you are only taxed Ksh. 80,000.
Apart from the above tax benefit at the contribution level, you are also allowed a tax relief at the payment level.
5. Choice of Investment Options
If you start saving for retirement in your 20s, you’ll have a longer time to invest. Therefore, you can select investment instruments that yield higher returns despite the high risks involved.
Should things go south and you don’t earn good returns as expected, you’ll still have time to bounce back.
Those who start late hardly have room to take risks. As a result, they go for a safe and more restricted type of investment.
6. Borrow Against Your Pension
Following the gazettement of The Retirement Benefits (Mortgage Loans) (Amendment) Regulations 2020, Kenyans can now access housing using pension funds.
Members of a retirement scheme can use their accrued benefits up to 60 percent as a guarantee to secure a mortgage loan while at the same time continuing to save towards a secured retirement.
On the other hand, members can access up to 40 percent of their accumulated benefits to directly purchase a house, provided the sum shall not exceed seven million shillings.
7. Deal With Uncertainty
Life comes with its share of uncertainty. It can throw us into a financial turmoil that we never saw coming.
Having a significant investment can help you overcome such turbulent periods. It also ensures your long-term goal of retirement remains on track.
Things You Need to Sort Out Before You Retire
Joseph Njuguna, a Pension administrator and consultant at Octagon Financial Services, says retirement is more than just the money. You have so much to live for. For instance, your family, friends, grandchildren, and oh! How about that dream vacation you’ve always wished for.
Here are four things you need to sort before you retire.
1. Take Care of Your Health
Please live a balanced life. Do what you love. Go to places that you want to go. Create a financial strategy that will set the motion and work towards it.
After a hard day’s work, take a rest. Your body needs to rejuvenate. Also, eat well and watch your diet while at it.
2. Put Your House in Order
What’s the need of accumulating a lot of wealth if you can’t enjoy your retirement in peace? Set your legal and financial matters in order.
Organize your wealth such that you have what you’ll live on in your retirement and what you’ll bequeath your family.
Have a written will in place so that your family doesn’t have to fight for your properties.
3. Cultivate Relationships
Relationships are not plug and play. You’ve to cultivate them. Be there when people need you. Attend family gatherings whenever you can.
We all need someone at some point in life. Being kind to one another will make people want to be associated with you.
Have you noted how grandparents light up whenever their grandchildren visit them? I bet they wish the grandchildren could stay longer.
4. Figure Out Your Passion
What are you passionate about? If you can invest some time in it, it’ll be important in the future.
For example, if you are good in personal finance, how about offering mentorship? Are you a good chef? Write a recipe book or teach your friends how to cook.
It’s advisable not to start a business with your retirement benefits because only a small percent of such businesses succeed. Therefore, only use part of your retirement benefits to boost a business that you’ve worked on and watched grow for years.
Bottom line
Saving for retirement is vitally important. The responsibility lies with you, not your employer. Know what you want and consistently work towards your goal. Taking such an initiative can guarantee you an income in retirement and ensure you maintain your lifestyle.