Planning for retirement: Where to build your eggs nest

Retired You is Still You. Retirement doesn't erase your identity. PHOTO | SHUTTERSTOCK

As retirement preparedness remains low in the country, identifying a sustainable plan has complicated the decisions of those planning for retirement.

Despite the increasing cost of living, asset and wealth managers say people need to start investing at a younger age even those not in an employer –sponsored retirement plan, while taking advantage of other avenues apart from pension schemes.

“In yester days, one would say that I will start saving after 50 years as that ideally gives an individual at least 15 years before the official retirement age of 65 years. But in the current economic times and the shift in work culture, individuals, both in their own business or employment are looking to ‘be free’ of the rat race and enjoy early retirement,” says Sandeep Main, an associate tax director and the Head of Enterprise at KPMG Advisory Services.

“The current culture is therefore to start saving for retirement almost immediately after one is employed or has turned around their business.”

Mr Main points to different retirement avenues including pension schemes, money markets, stocks, or opting for low-risk investments such as fixed deposits placed with financial institutions.

Trading in medium to long-term bonds preferably tax-free bonds with a longer maturity duration is also on the list, placing consideration on risks, age, financial situation and investment goals.

“There are several avenues available. The choice of investment will depend on an individual’s risk appetite as well as access to cash flows,” he says.

“Several individuals have also opted to invest in the real estate markets through the purchase of land mostly that will likely be held for the medium to long- term of over 10 years before the onward sale,” he adds.

When it comes to retirement planning, Kenyans are way behind.

The pensions industry’s assets under management increased by just 4.03 percent to Sh1.57 trillion in December 2022 from Sh1.51 trillion in June 2022.

Compared to the same period last year, the assets grew marginally by 1.86 percent, up from Sh1.54 trillion in December 2021.

According to the Kenya National Bureau of Statistics, about 13.9 million Kenyans have no form of a retirement savings scheme, and most are in the informal sector.

“The labour market is skewed towards informal employment at 83 percent. This is a time bomb and indicates that most Kenyans will retire poor,” the KNBS report stated.

According to Kenya Orient Life Assurance principal officer Jackson Muli, initially, the assumption has been that saving is for those employed hence targeting government and private sector employees.

However, insurers have introduced individual pension to cater to those in the informal sector.

‘’Retirement planning is important for future, older age and for your uncertain time when you might not have the energy to work, maybe because you are unemployed, sick or incapacitated to work,” says Mr Muli.

The Retirement Benefits Authority (RBA) states the early retirement age in the country is 50 years.

“The importance of retirement from employment is not permanent. We have challenges in the economy, businesses can close up so it doesn’t mean retirement is aging. People confuse retirement with aging. Retirement is the preparedness of yourself at the time you are not able to do your norm. People look at retirement at the age of 80,” Mr Muli adds.

He recommends at least five percent of earnings and can go all the way to 30 percent to avoid strain on their budget.

“There is no formula. What guides the amount of savings that a person can put into a savings scheme is the law of a third rule, saving not more than 30 percent of your basic salary. So if you are in a scheme where members contribute 10 percent and the employer contributes the same, there is a balance that one can still save.”

The culture of saving, he says, is very important and adds that the more you save, the better for yourself in the future. “Saving should be immediate when you start making any earnings.”

For options of saving through a personal savings bank account, one can start as low as Sh1,000, Mr Main says, and with approximately Sh100,000 if investing in bonds and money markets.

What Kenyan retirees want

A Retirement Preparedness Survey in 2019 revealed that 79 percent of Kenyans planned to start a business after retirement, while 29 percent planning never to retire but work their whole life.

About 39 percent feel their children are their retirement package, indicating that the country still lagged behind on retirement saving and many people are yet to have retirement plans.

‘’The need for individuals and households to sort out the basic needs leaves less disposable income for saving for retirement, amid high cost of living,” adds Mr Muli.

“I would not say it is a perception but a lack of knowledge. It’s an issue of training and keeping people well-versed with information about retirement, that you need to prepare for retirement.”

Many retirees are not adequately supported to effectively manage their pensions when they retire, adds Mr Main.

“Retirement involves multiple options and a level of complexity that makes it very challenging for retirees to make decisions on their own that will improve their standard of living in retirement,” he said.

“Maybe you are thinking about succession. This can involve setting up structures and embedding a suitable tax strategy, but also thinking hard about the family’s legacy and the meaning of its wealth. Understanding these issues, and any possible pitfalls, is not easy.”

The main consideration for investments is taxes, especially for investments other than pension schemes, and the current cash flow needs of the individuals.

The industry’s regulations have allowed pension income received by retirees above the age of 65 years to be exempted from tax.

As the pension industry grows, Mr Main says many trustees have been actively designing and testing different retirement solutions for some time and there is an increasing level of development activity in the retirement sector.

“Retirement involves difficult trade-offs, including complex interactions with other systems like tax, social security, and aged care.

The enactment of the National Social Security Fund (NSSF) Act 2013 in February increased salaried employees’ monthly deductions from Sh200 to Sh600 for the lowest earner and from Sh320 to Sh1,080 for top earners, with pension firms seeing increased savings for retirees.

The upper limits on contributions are set to rise every year.

The total pension contribution for both the worker and employee is supposed to be a maximum of Sh4,136.

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