I live on Sh100,000 per month salary and have some cash I feel like I need to invest. How should I invest my Sh10m now if I plan to retire in 8 years?
I applaud you for seeking prudent ways of investing the Sh10 million that you have accumulated. This shows that you have the foresight and prerequisite commitment to create and maintain wealth in the long haul.
Retirement should not condemn you to a life of boredom or dependency. In fact, how you plan your next eight years could see you end up living the life that you have always desired.
Whether or not you anticipate getting some retirement funds in the next eight years, you should be able to make an investment that will generate enough cash flow to maintain your current level of income.
The minimum level of income that you require to maintain your standards of living after retirement is measured or explained by the net replacement ratio (NRR).
The recommended NRR is 70 percent and therefore, seeing that your current salary is Shs100,000, you should target an income stream that gives you at least Sh70,000 monthly in the next eight years.
Before we delve into the various investment vehicles and financial principles that you could live by, I am curious about your current financial obligations such as rent, school fees, parent’s maintenance, and other utilities.
Having a clear picture of what you are obliged to do every month can enable us to have a tailor-made solution that will work for you in the long run.
That notwithstanding, let us look at the investment strategy and various considerations you need to have before investing.
Investment strategy
As you near retirement age, your investment approach should be conservative and not aggressive. A conservative investment approach builds a portfolio that is focused on capital preservation and less on fund growth or profits unlike an aggressive approach that follows the high risk and return principle.
A conservative investment approach tends to shy away from stock and concentrates more cash on a fixed income. Your 50s is not the time to seek an adrenaline rush by investing in stock and going through the motions that come with an inconsistent stock market due to bullish and bearish market conditions.
While indeed income gained from stocks/equity is likely to double in the next eight years, the risks far outweigh the benefits of holding into listed equity.
Your best bet at this juncture would be to have a fund whose investments are concentrated on short-term and long-term fixed income such as Treasury bonds, bills, cash, and bank deposits.
While you can play around with the ratios, the ideal investment would be to have 70 percent of long-term fixed income- (exceeding one year) and 30 percent short-term investments of less than a year.
Money market that you may consider includes bank deposits, Treasury bills of less than 364 days, less than 1-year bonds, and corporate debt. Long-term fixed income would be good government bonds with a limit of eight years.
You need to consider the following factors before choosing an investment vehicle or approach:
Personal investment expertise
Before getting into any investment, you need to assess the knowledge you have against the different investment vehicles. Investing in something that you are well conversant with makes the investments predictable and you can track the performance of the fund.
Further, do a survey on the fees that investment managers charge so that you don’t end up offsetting your gains with high investment costs.
Also, ensure that every investment is well documented and read the fine print of every document so that you do not ignorantly sign up for things you did not bargain for.
Skills and gift
Did you know that you can prepare you for retirement by nurturing your key skills and gift? Let us say, for example, that you are a teacher.
Even after you retire, you can start a small kindergarten that can grow exponentially and enable you to live well even after retirement.
You can seek an expert’s advice on how best you can grow your gift to generate some good income for you.
Mode of investment
You may choose to invest the money yourself through the Central Bank of Kenya (CBK) by opening a central deposit of government securities account (CDS) through the CBK’s website.
You are required to have an operational commercial bank recognised by CBK, your Kenya Revenue Authority (KRA) certificate, a passport photo, and a copy of your national identity card.
Alternatively, you may choose to engage a qualified fund manager to handle your investments at a small fee which assures you of good portfolio diversification, good returns, and less risks.
Fund manager specialisation
You need to be keen on the expertise of the fund manager and the average rating over time so that you do not lose the value of your capital.
Also, some managers specialise in different asset classes and are hence likely to perform well on where they have concentrated on.
For instance, a fund manager that is an expert in property would excel well in property as opposed to fixed income.
Fund manager tenure and stability
Also, consider the tenure of the fund manager and their stability over time. Use the help of a financial advisor to assess their audited financial statements so that you invest in a fund where you are sure that your funds are safe.
An advisor can also give you insight into good and stable fund managers that have consistently shown good performance over time.
Further, I would cushion against going for fund managers that currently have high but relatively volatile returns. Ensure that the range of the returns is low as that would translate to better performance stability.
Inflation level
As per the statistics published on the CBK website, the 12-month average inflation rate is 7.90 percent while the annual average inflation 8.71 percemt in April 2023.
You must ensure therefore that you get returns that will cushion you against the inflation. Bills issued in May 2023 had an average coupon rate of 10.5 percent while the bonds 14.23 percent which means that you comfortably get a return of at least 4 percent above the inflation.
Ms Kibata is an investment analyst at Zamara and can be reached via [email protected]
