Spending retirement lump sum cash wisely

One of the most troubling questions that an individual nearing retirement ponders about is what to do with the lumpsum pay.

After their years of service, employees receive a ‘gift’ from their employers often referred to as gratuity.

Successively, the individual is entitled to their full retirement benefits that may leave them overwhelmed by the sudden inflow of cash.

Without careful planning, one poor decision can cause them a serious sprawl into poverty, hence wasting their decades of hard work.

A satisfying retirement takes more than just money but of course, you will need enough income to get by.

Assessing whether earnings from your income generating assets, drawdown or annuity, NSSF and other savings can fund your lifestyle will eliminate possible money woes.

This is something that many Kenyans have failed to achieve. They are unable to maintain their pre-retirement lifestyle because they only get 55 percent of what they used to earn during their working years, often referred to as income replacement ratio.

This is data from a survey conducted among retirees by Enwealth Financial Services that tallies with findings by the Kenya National Bureau of Statistics (KNBS). Never worrying about bills or going broke again will allow you to focus on things that money cannot buy. This is only achievable with practical financial planning.

From our experience in the pensions space and working with people in transition from working to retirement, we have observed and analysed individuals’ thinking patterns upon receipt of the lump sum and their behaviour afterward.

During the working years, many access their monthly income between the 25th and 5th of every month.

So, for example, someone has become accustomed to finding a specific figure in their bank account — say Sh150,000 — month after month. With that the individual is in a psychologically steady state.

If they work up to retirement, they can get a cash lump sum of up to Sh 10,000,000 depending on how much and for how long they have been contributing to the pension scheme.

This can completely distort their psychological equilibrium because of the magnitude.

The Le Chatelier’s equilibrium law argues that if a system in equilibrium is subjected to change, the system will offset the change and adjust back to the steady state.

In our retiree’s case, the individual will, therefore, seek ways to reduce their Sh10,000,000 to the usual Sh150,000.

That’s where poor decisions like unplanned vacations and impulse purchases are made. You may believe that as the rational person you are this would never happen to you, but would you rather wait and test yourself or think through it and prepare early before the money you have worked so hard for hits your bank account?

Pension players are attempting to fill the knowledge gap by mobilising trainers to educate retirees on available options like drawdown funds, annuities, government securities among other options that would give one financial security during their retirement years.

There is no one-size-fits-all in planning for the retirement lumpsum. One needs to consult independent financial advisers who will assess their income and look into their budget expenditure.

He or she will then advise on the best investments that will yield the best returns to cover their expenses from month to month.

Financial advisers can evaluate the riskiness of the various instruments and advise accordingly. With the recent rise in pyramid schemes and sham investments, retirees are exposed to swindling. Retirement funds are also exposed to inflation risk.

The individual may have done their calculation wisely but inflation renders their income inadequate with time.

In conclusion, although low income is not always associated with unhappiness and vice versa, maintaining the kind of lifestyle we adopt during our working years is almost always related to an individuals’ level of happiness.

The money decisions one makes today will determine their financial state as they (hopefully) enjoy their sunset years.