As 2024 has progressed, financial literacy has jumped to the top on priorities for many especially given the tightening cashflow thanks to increased deductions and cost of living.
The girlies in the chama were curious how they can actively accumulate their pension savings to earn approximately Sh300,000 per month in their retirement.
This is a welcome thought seeing that the duration to retirement is approximately 30 years among them. So how do we go about this big hairy audacious goal?
A simple rule of thumb suggest that one percent of accumulated lumpsum translates to your monthly income. Our goal is to receive a monthly income of Sh300,000 thus the lumpsum at retirement should be approximately Sh30 million.
The exact amount will vary depending on the prevailing long-term interest rates and other factors at the time of retirement.
Since the future is unpredictable, we can make reasonable assumptions based on data from the past few years as our guide. A few key assumptions are;
First, the average return on investment on your contributions will be assumed as 9 percent annually.
Secondly, the amount of contribution does not increase throughout the saving period i.e fixed amount.
Thirdly, the contributions are made at the end of each month.
Fourthly, there is no employer matching contribution.
Time horizon: If you are just starting out either in employment or business and commit to contribute towards your retirement account, time is on your side. At 25 years and looking to retire at 60, that’s 35 years of dedication to one’s financial security in retirement.
Contribution: With the above assumptions, Anita who is 25 years old must set aside Sh11,500 per month while Layla a 30-year-old must set aside Sh17,500 per month. You will note the fewer the years you have to the desired retirement age the more you have to contribute to achieve the same target.
Access: Pension laws in Kenya allow you to access a portion of the contributions plus interest before retirement age. It’s important to resist the temptation to dip into the pension pot when times get tough. Always remember the goal is financial security when the silver hair is in full bloom. Stay disciplined.
Convert Sh30m to monthly income
Once you have accumulated your retirement fund the next step is to convert it into a reliable income. Annuity is one way to go about this.
Annuity is a contract between you and a life insurance company where you deposit a lumpsum upfront, and in exchange, the insurer pays you a guaranteed monthly income for life. This arrangement ensures you don’t outlive your savings. This is a contract for life.
Selecting a provider: This is a very crucial decision point since once you settle for an insurance company you can’t revoke the contract. Research the life insurance companies in the market before settling. Seek the guidance of professionals in the industry to make an informed decision.
Factors to consider that may impact the exact monthly income at retirement include.
Escalation: Similar to an annual salary increase. Your annuity amount will be increased automatically annually with no need for performance appraisal. If you select a higher escalation your annuity contract may start at an amount lower than Sh300,000 but will grow year- on- year by the selected rate. This helps with inflation hedging.
Guarantee period: The period where the life insurance company provides a guarantee to settle the monthly annuity. The more the guarantee period the annuity contract may start at an amount lower than Sh300,000 but in exchange you have locked in time.
In the event you kick the bucket before the guarantee period has lapsed, your beneficiaries can receive the monthly amounts until the lapse of the guarantee period or receive the discounted present value of the remaining term.
Retirement planning is a long-term commitment
The specifics of annuity products and retirement planning will continue to evolve over the years to come, the principle of saving consistently and starting early remain key.
For Anita at 25 years and Layla at 30 years the goal is to make regular, disciplined contributions to build that big hairy audacious number of Sh30 million or more.
Cheers to building your retirement pot and a financially secure future.
The writer is a retirement coach and Manager, Umbrella and Retail solutions at Zamara. She can be reached via [email protected]
