Personal Finance

What you can do to retire in comfort


Most people have to continue working hard even after retirement to feed their families daily. FILE PHOTO | NMG

The current income replacement ratio for Kenya is below 40 percent. This means that a Kenyan who is earning a salary of Sh60,000 during his last working month will be earning a salary of Sh24,000.

Income replacement ratios for countries such as Canada and China are about 53 percent and 83 percent respectively, according to a 2016 report, with the highest being Croatia at 129 percent.

If Kenya becomes like Croatia, a Kenyan earning a salary of about Sh60,000 will earn pension salary of about Sh140,000. Retirement would be so enjoyable, majority of Kenyans would make early retirement an option.

Unfortunately, that is not the case. Most people have to continue working hard even after retirement to feed their families daily. But that does not have to be the case always. Here are six things that you can do to retire well.

Set aside money for retirement

Opening a personal pension scheme is ideal for a start if you are currently not a member of any pension scheme. The beauty of a personal pension scheme is that they are very easy to set-up, and contributions can be received anytime, not necessarily monthly. They are ideal for business people and other individuals whose employers have not yet started a scheme. Personal pension schemes are also useful for consolidating pension benefits from previous employers since these cannot be cashed out before attaining age 50 retirement age.

Put in more money to your already existing pension scheme

This can be done through additional voluntary contributions. Pension providers such as Enwealth provide members with online tools to track savings project the future value of savings and get quotations showing how effectively their accumulated pension would replace their salary at retirement. Through such resources, one is able to tell how much they will be earning at retirement in the form of a regular pension.

According to our research, an individual contributing 10 percent of their salary to a pension scheme is likely to achieve an average salary replacement rate of 51-55 percent of their pre-retirement salary in the form of a pension at age 55 years. It is therefore important to increase your contributions giving priority to increasing your pensions income as you grow older.

By contributing that Sh5,000 every month, you stand to have a retirement lumpsum worth at least Sh3.5 million after 20 years or Sh6.1 million after 25 years due to the effect of compound interest. If you have less than 10 years to retirement you may need to save up more.

Start now not next year

The hardest bit is starting, then the consistency. Simple ways that can help you with consistency include putting up standing orders at the bank for say, every 5th day of the month, for the bank to debit a certain sum of money. This automation not only eases up the payment process but it’s also a decision you have to make once and it’s done unless you decide otherwise.

Other easy options are M-Pesa payments, and direct bank transfers.

Avoid making withdrawals every time you leave an employer

Instead, consolidate those funds through a personal pension scheme for ease of access in the future. This will help you grow your pension gradually. Unless it’s completely necessary, you can say no to instant gratification and have those funds continue earning interest.

Use your pension money to obtain collateral for a mortgage loan

Abour 60pc of your Pension savings can be used as collateral for a mortgage which you will be able to pay off over time, so that at the time you retire, you already have a home of your own. A recent study showed that most people use their pension lump sum to buy a home which should not be the case. Proper planning can help you own a home before you even retire.

Ensure you are informed on your savings in a pension scheme

This means you attend the AGMs and the member education forums organised by your employer and scheme trustees. Knowledge is power. Being proactive about this will help you become more informed for example about options you have now, or even at retirement.

JOY KAREKO, Pension consultant at Enwealth Financial Services.