Financial goals: What quality of life do you want to live in retirement?

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Investment return is probably the most important key in the set of keys that unlock a dignified and comfortable retirement. PHOTO | FOTOSEARCH 

Question: Help me evaluate retirement aspirations, considering factors such as lifestyle expectations, healthcare costs, and the role of pensions in achieving a realistic and sustainable retirement.

What quality of life do you want to live in retirement? This is the question that should be at the heart of all your financial decisions in the present day. Why? Because your actions now will impact your life in the near term, the medium term and the long term, your financial welfare does tend to impact the rest of the areas in your life.

Picture the life you would want for yourself when you hang your boots. Probably, you would want to be as far away from the hustle and bustle of the capital as possible. And maybe, at the age that you are right now, you might feel like you have had enough of it, let alone when you hit 55.

Most, if not all financial experts, advisors or even planners will tell you that the secret to a comfortable retirement, is to ensure that you structure your finances in such a way that all the different investment cohorts work together. Your retirement savings account should work in tandem with your other investments in the accumulation phase of your lifecycle to ensure that the decumulation phase is efficient, functional, and ultimately, enjoyable.

You will need to look at the various tools available to you, to get an indication of whether you are on the right track to a comfortable retirement. Chief among these tools is the IRR or Income Replacement Ratio. This refers to the percentage of an individual's employment income that is replaced by retirement income when they retire. As an example, should you earn Sh100,000 a month by the time you retire, you will need enough money saved up in your retirement pot to give you a monthly payment of Sh100,000 from a post-retirement arrangement.

This ensures that, for the most part, you will not experience a dip in lifestyle during retirement from a regular cash flow perspective. While maintaining your regular income is key, it is important to note that this would not represent a significant positive change in lifestyle during retirement, it would not, for example, buy you a beach house you did not previously own. We must thus ensure that all our other investments are working in tandem with our retirement account to ensure that our dreams and ambitions are comprehensively covered.

To get to a suitable IRR, a thorough evaluation of your retirement account cashflows is needed. You need to take action to ensure that you have enough left in your retirement pot to fuel your dream. To start with, are you putting away enough to secure your old age?

If not, it may be the time to start putting away additional voluntary contributions. These, as the name suggests, are contributions to your retirement account over and above what is statutory, and as per your contractual agreement with your employer.

The next step is to ensure that you are not working at cross purposes with your retirement goals. This is mainly done by raiding one’s retirement vault. Most of the individuals who are actively saving for their retirement, access their retirement funds once they switch employers depending on how much the prevailing law allows them to.

Currently, the allowed limit is 50 percent of savings. This slashing in half of one’s retirement funds represents the biggest threat to one’s retirement dream, as consistently taking away from your account every couple of years, is bound to leave you exposed in your golden years.

Investment return is probably the most important key in the set of keys that unlock a dignified and comfortable retirement. The rule of seventy-two is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return. This is arrived at by taking the number 72 and dividing it by the projected annual rate of return.

As an example at 10 percent return, one would be expected to double their investment in 7.2 years. Hence, the higher the return, one can eke out of their investments, the shorter the time it will take to double, triple or quadruple their investment.

If you take two individuals who are the same age, who start saving at the same time and with identical cashflows but at different returns, the amount that they would receive at the end of their investment horizon could potentially be vastly different.

For example, if one achieved a mean return of eight percent over 30 years and the other 10 percent over the same period while putting away Sh20,000, then there would be a difference of Sh13.1million in their retirement corpus, with the first individual receiving Sh28.2million and the second individual receiving Sh41.4 million.

Based on your age, previous risk averseness and investment horizon, it may make sense to stomach a little more risk in my investments in anticipation of a superior long-term return. Indeed, continuing to invest in only “safe assets”, probably giving you an average return of 8-10 percent for the majority of the years you have left, may not get you to your desired target of living an extremely comfortable life in retirement.

The writer is a consultant on retirement solutions. | [email protected]

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