The one thing that the Covid-19 pandemic has put to the test is our financial preparedness for uncertain times.
Many people have suffered job losses and have had to come to terms with reduced income. The dependency rates in Kenya are at their highest level yet. And when you think about it, that is exactly how your retirement will be.
The question then is, how well are you planning for retirement?
COVID-19 will eventually come to an end. Retirement, on the other hand, is inevitable. Traditionally, retirement meant the young, energetic and working population taking care of the older generation. However, increased urbanization has led to the disintegration of these practices leaving the elderly to take care of themselves resulting in an increase in old-age poverty.
The retirement benefits sector in Kenya bridges this gap and allows members to save for their retirement in well-governed schemes under the oversight of the Retirement Benefits Authority (RBA). The RBA is a body formed by an Act of Parliament in 2000, whose primary task is to oversee and promote the retirement benefits sector and ensure the protection of members’ benefits.
Why saving for retirement should be a priority
Even with the schemes in place, it boils down to your personal decision to save for retirement. This is more so the case as most of our population is in the informal sector, with no prescribed retirement saving plan, in contrast with those in formal employment.
For numerous reasons, saving for your retirement should be at the forefront of your mind.
- To enjoy your golden years. Retirement for many means transitioning into a more relaxed lifestyle and having the time to enjoy all the things you had no time for during your working years. This could be your hobbies, family and friends, travel, and recreational activities. To do this comfortably, you must save enough for retirement.
- To not be a burden to your family. Adequate retirement savings include saving for medical costs and potential long-term care costs. You won’t have to rely on your family when your expenses are covered. Giving you peace of mind and allowing your family the freedom to flourish without the burden of ‘black tax’.
- To enable you to cater to your health care and live a longer, healthier life. Research shows that the number one thing that people worry about is money. No surprise there. Having your retirement savings will afford you peace of not worrying about money. Secondly, you will be able to afford medical care, as this is a major expense at retirement. Both of these translate to living a longer, happier (stress-free) life.
- You’ll pay less tax. When you contribute to a retirement benefits scheme, you pay less tax. In formal employment, your contributions to a pension scheme are deducted from your gross pay before your Pay As You Earn (PAYE) is calculated. If you are in the informal sector, you can claim the tax benefit at the end of the year when filing your returns. This is the ultimate win-win as the government wishes to encourage its citizens to save for old age, relieve the strain on the fragile retirement system, and extend tax incentives to encourage saving.
- You will enjoy the power of compound interest. Albert Einstein is rumoured to have said that the most powerful force in the world is compound interest. We could not agree with him more. With compound interest, income from your retirement savings is compounded every year. This leads to faster growth of your retirement benefits, making your contributions work hard on your behalf. For example, a 25-year-old looking to retire at 60 and making monthly contributions of KES 2,000 per month will receive KES 8.20 Million at retirement. Yet, his total contributions will only be Kshs 0.84 million (less than one million!), assuming an annual return of 11%. That is the power of compound interest.
I’m saving…but is it really enough?
In addition to committing to saving for retirement, it’s important to evaluate how adequate your savings are. Currently, in Kenya, the adequacy for those saving for retirement is low, with the income replacement ratio coming in at 34% against a recommended ratio of 75%. For illustration purposes, suppose you earn KES 100,000 before retirement; you would need around KES 75,000 to continue with the lifestyle you have become accustomed to comfortably. Unfortunately, the data in Kenya shows that you would have saved only enough for KES 34,000 a month.
There are several ways to improve this:
- Have more than one retirement plan. If you have a retirement plan by virtue of your employment, you should consider also opening a separate account in an individual pension plan to make additional retirement saving and thus increase your retirement benefits. There are several registered individual pension schemes in Kenya, including the Gencap Individual Pension Plan.
- Avoid cashing out your retirement savings once you leave/change employers. Studies in Kenya show that 95% of members who leave employment withdraw the maximum allowable benefits every time they change employers. This depletes your retirement savings, meanings low income at retirement.
- Make additional voluntary contributions when the opportunity provides itself. When you get additional income, say from a bonus payment or windfall, you should make additional contributions to your retirement scheme to increase your retirement pot. Every bit brings your dream retirement closer.
- Start today. It’s never too early to begin. You can start saving for retirement from as early as 18 years. The longer your saving horizon, the more you can save and the bigger impact it will have on your retirement pot. And with low minimums, for example, KES 1,000 with GenCap Individual Pension Plan, it is accessible to everyone.
- Kenyans to Miss Retirement Goals by 50%, Urged to Seek High-quality Financial Advice
- Most Kenyans are not Prepared for Life After Retirement
- Kenya’s Pension System Ranks Second in Africa, 55th Globally: Allianz
Saving for retirement plays a critical role in the poverty alleviation of the elderly. Whether you are still in your 20s and 30s or on the off-ramp to retirement, it’s not too late. Evaluate where you are with your savings and start planning for the life you want at retirement.
The choice that you make today will determine your lifestyle during retirement. Make it the lifestyle you have always hoped and dreamed of.