Are we saving enough ahead of retirement?

In Kenya, the role of a retirement benefits scheme has changed from being a mere employment offering to being a crucial part of helping employees achieve their goal of financial independence.

Over the past few years, the retirement benefits sector has grown at an exponential rate, with around Sh400 million in assets in 2010 to Sh800 billion in assets in 2016 to crossing the mark of Sh1 trillion by the end of 2017. This represents a huge amount of savings into retirement and making pension benefit schemes one of the largest institutional investors in Kenya.

Even though large sums of money are saved for retirement, do Kenyans know whether they will have enough income after retirement, whether they will maintain their standard of living after retiring from work, whether and how they can improve their retirement income?

Unfortunately, most Kenyans do not know the answers to these questions.

In fact, the ages between 50 and 55 are the golden years when most Kenyans start questioning whether they have enough retirement income to live a decent quality of life after retiring, when their working life is almost over, which is almost always too late.

Given the increasing importance of retirement benefits savings, it has become more critical for Kenyans to understand what affects their pension savings, what they are projected to be at retirement and how they could improve it to live a sustainable life after they quit employment.

For one to know whether they are saving enough for retirement they could estimate the rate at which their retirement income will replace their pre-retirement income. This is known as the Income Replacement Ratio. Around the world, financial advisers generally recommend a plan that targets an Income Replacement Ratio of 75 per cent — a figure that would include all forms of post-retirement income, not simply your company-sponsored pension scheme.

An Income Replacement Ratio of 75 per cent would mean that an individual earning a pre-retirement income of Sh100,000 a month would earn a retirement income of Sh75,000 a month, as a pension, for example. It is important to note that every individual has unique circumstances and needs to determine their own target based on their own needs. A target between 60 and 80 per cent is probably enough for most people to maintain their quality of life after retirement and to meet the rising medical costs after they retire.

Zamara had recently carried out Income Replacement Ratio investigations for various defined contribution retirement benefit schemes covering more than 60,000 members. It was found that on average a member will get a monthly retirement income of 34 per cent of their pre-retirement income as a pension after retirement.

This means for every Sh100,000 earned per month before retirement, a member will be able to replace 34 per cent, that is, they will have a pension worth Sh34,000 a month.

This is way below the recommended target and means that members will have to rely heavily on other sources of income to supplement their pension benefits.

Members of retirement benefits schemes aged above 55 are expected to have income replacement ratios between 0 and 25 per cent.

Investment decisions

The reason for this is that these group of members had not saved enough for retirement or started saving at a later stage of their working life or did not preserve their benefits when changing employers.

The members of retirement benefits schemes aged between 25 and 35 are projected to have an average income replacement ratio of 42.6 per cent at retirement.

These groups of members have ample time to improve their Income Replacement Ratio.

The factors that affect Income Replacement Ratios are the number of contributions made, the rate of increase in salary, the investment decisions are taken, the portfolio returns, whether the member preserves their benefits or not, the amount of time a member save for, the retirement age and the cost of the pension.

I will be discussing these factors in more detail in my forthcoming articles.

But for now, let me ask, do you know whether you are saving enough for your retirement?

Arth Shah, Actuarial analyst at Zamara Actuaries, Administrators and Consultants Limited.