advertisement
Personal Finance

Building a retirement nest using your chama

Members of a Chama
Members of a Chama. FILE PHOTO | NMG 

Experts say that the proportion of people who can afford to retire and live comfortably is only 43 percent. In many cases, people feel ambushed into retirement.

Financial advisers recommend that there should be increased financial literacy to deal with the problem. One of the solutions suggested is the formation of investment clubs (popularly known as chamas) that would enable retirees to earn extra income.

“Many Kenyans are caught by surprise in retirement when they realise that their pension is far from adequate. Many a time these savings will only last two or three years and they have to look for other ways of sustenance which will probably bring less income or be erratic. Relying on this income for rent, for example, is difficult if you already do not have a home of your own,” says Tony Wainaina, founder of Investment Group Advisors and a senior executive in the investment industry for more than two decades.

Mr Wainaina, who has recently revised his book on the subject of investment clubs and how they can be used as earn extra income especially in retirement, says that the numerous expenses that come when one has no income are capable of leading to mental health issues.

“There are medical bills to be paid and many people are force to fall back on their families. Mental health issues kick in and you see people suffering from depression, start drinking cheap alcohol and they have a rapid decline in health. They cannot earn much after that and are soon headed to the grave.”

advertisement

He recommends that savings for retirements start as soon as one is employed or starts a business. “I strongly believe that financial literacy classes should start in primary school as part of the curriculum. We are more of a consumer nation.

The National Social Security Fund is the only thing we have and it is highly inadequate. There was a lot of resistance in trying to ensure it can pay more. There is a chance of improving the situation with investment clubs,” says Mr Wainaina.

He adds that such clubs could range from highly formalised to informal.

“What you need to ensure is that you have like minds and you have long-term goals as members. You first decide where you want to invest. There is a whole range of assets: property, government securities, money market funds and the like,” shares Mr Wainaina.

He advises that investors as members of the club look for uncomplicated structures of assets especially at the beginning which will maintain liquidity and can therefore be cashed within days should the need arise.

To operate optimally, Mr Wainaina says the club must deal with the following challenges or situations in its life.

1. GOVERNANCE

“Choose the right board or committee on the basis of abilities and not on popularity. It should not have more than five people if your club has 15 to 20 members,” he says.

2. SIMPLE HOUSE-KEEPING

The club must keep basic accounts at least once every three months. It should have records on where money is invested, what is used for expense, income, expenditure, a balance sheet, do annual audited accounts and returns, ensure tax compliance and compliance with credit reference bureaus.

3. DUE DILIGENCE

Perform due diligence before putting cash in any asset to ensure that members do not burn their fingers in investments.

4. PROPER DAY-TO-DAY MANAGEMENT

Initially operations of the club will be conducted by its officials, but at some point it needs somebody to manage its affairs, ensure it recruits service providers to do accounts, filing records, among other things.

5. TRAINING FOR MEMBERS AND OFFICIALS

Mr Wainaina says that members have the option of going through training that help them manage their affairs in their best interests. Such training would be on such issues as investment planning that involves the levels of contributions. “It means that you can have a minimum level of contribution. But you should also allow higher contributions so that you are not limited in growth by least common denominator, that is, the minimum contribution,” he says.

The training also tackles issues of management and administration of the club, executing investment plans, strategic planning, among others.

6. LONG-TERM RETIREMENT GOAL

You may at some point in future dispose of your assets and then buy a sizeable property,

advertisement