Investment options ahead of retirement

Kenyan pension schemes have registered negative returns in the quarter ended September. PHOTO | SHUTTERSTOCK

Retirement is a very wide arena where it is hard to figure out what the rest of your life will be like and whether you can achieve the lifestyle you always desired.

For a start, retirement brings about a shift from continuously trying to save to figuring out how you are going to survive off what you have saved and invested. The goal becomes how to successfully manage and invest your retirement finances.

Retirees face two major risks; either your money loses its market value or you go completely broke. No one wants to run the risk of running out of finances or having to drastically change the way they are used to living.

According to a retirement confidence report by Enwealth Kenya and Strathmore University a few years ago, only 1 in 7 respondents are “very confident” that they will outlive their retirement savings, hence the need to have alternative investment avenues that will stretch and enable your money to cover your sunset years.

Income-generating investment avenues are a good choice for your pension pot. This will help boost the chances of beating the constantly rising inflation.

Case in point, Kenya’s inflation rate has been on the rise since March as a consequence of what is happening globally; oil prices, variables touching on the exchange rate and fiscal and monetary policies, and domestic production policy.

This means that for someone who retired five years ago, their money has drastically lost its market value based on the current inflation rate. The point is, you never know what will come up hence the need to cushion yourself.

This is why even as a retiree, you need to take advantage of investment avenues that ensure your income is regular and sufficient to meet your expenses.

One of the most common investment options offered by insurers is annuity. You can use your lump-sum from your pension to invest in an annuity whereby you give a lump-sum of money to your insurer and get regular payouts in return until you die or for a period you choose.

You can choose the type of annuity that fits your needs. There is a single life annuity which enables you to get payments throughout your life and it has no beneficiaries.

You can also opt for a life annuity with a guaranteed period that is given within a certain agreed period, say 20 years, Joint and survivor annuity that allows both the annuitant and principal member to benefit throughout their lives and a systematic withdrawal annuity where you can choose both the amount and regularity of payments are also available.

One can also opt for an income draw-down option offered by pension administrators that enable members of any retirement benefits scheme, upon retirement to instead receive their saved-up benefits as monthly income by reinvesting their income in an income drawdown fund registered by RBA.

This gives pensioners an alternative to annuities, where the retiree can draw down on their pension while their residual is still being invested. With a good average return of 12 percent, you can draw down from the interest as the principal is being reinvested.

At the end of the 10 years you can renew your contract with an income drawdown fund or transfer the money to an insurance firm for the purchase of an annuity or take the lump sum amount.

Since retirement period may last many years, retirees need to invest in some growth-oriented avenues to keep up with inflation. Good quality dividend stock can also be good option.

Since you are trying to avoid risk, focus on having shares in organisations that have value, are established and are competitive in their industries. Do your homework; look for organisations with a good history in stock dividends.

Another good investment avenue is bonds offered by the Central bank of Kenya. Treasury bonds are secure investment that gives you interest payments in specified periods throughout the bond’s maturity. However, in Kenya, most Treasury bonds are fixed rate meaning they are locked to maturity.

A good post-retirement strategy is to invest in different bonds that mature at different times to keep the interest and reinvest the principal from older bonds to get sustainable income from them. The good thing with bonds is the cash flow of interest payable every 6 months until the bond maturity.

For instance, if you invest Sh10 million on a 20-year infrastructure bond at 13 percent you are assured of Sh650,000 payable every 6 months for the next 20 years and at maturity, you receive the principal amount.

Investment doesn’t stop when you retire. Investing as a retiree is one of the areas everyone needs to carefully explore. One must keep up with the inflation and sustain their lifestyle and that of their family. Remember you are always responsible for your tomorrow, even when you are already retired.

Ms Sanga is an assistant manager- Investment Accounting at Enwealth Financial Services

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