Now is the time to start saving and investing for retirement

If it has not occurred to you yet, you will not be 20-something forever. When you are in your twenties, especially early twenties, you feel invincible, you are at the top of the world, the world is your oyster, so to speak, and you are all about having a good time.

You are probably on your first job, and you and your buddies look forward to end month with great anticipation, and cannot wait to party the first two weeks of the month away.

The fact is that you are growing older, and one day, you will be 40-something with children that need school fees and a host of other needs, as well as a mortgage. If you are prudent with your money in your twenties, you will be a content 40-year-old, but if you blow it all away on a good time, you will be a miserable 40-something-year-old.

Ladies and gentlemen, this is the time to start thinking about long-term saving and investment.

The first thing you need to look at is your holistic financial well-being, which you need to break down into three areas:

Create: This is ideally where everyone should begin; the earlier you begin to save and invest, the better. You have a huge margin to recover from any losses in your investment at a younger age.

Grow: From your initial investments, you need to ensure that there is a steady trajectory of your return on investment to ensure that you will keep earning from your assets.

Protect: As you age, the aim is to ensure that you protect your assets so that they still generate wealth for you.

We had a chat with Angela Okinda, an actuary with close to a decade’s experience in the insurance industry, and also the Head of Retirement Funds at Alexander Forbes Financial Services. We found out the importance of saving early and what saving and investment options exist in the market.

How much money do I need to start saving?

Since it is over a long period, it doesn’t have to be painful. It doesn’t have to be 20 per cent of your earnings. It could be 5 per cent because you have time. It can be invested and it can gain from compound interest.

What investment options are there for me to choose from in the market?

SHORT TO MEDIUM GOALS-BASED SAVING

Insurance companies have packages that allow you to simply create a saving goal for either of these, and once it matures, it is released to you for use. With these packages, you dictate how long you want to save and how much. You can save for mortgage, holidays, weddings, and a host of other needs and wants. 

LONG TERM-RETIREMENT PLANS

NSSF: The National Social Security Fund is a government-run retirement benefit scheme. Ideally, what happens is that you save a certain amount of money each month, and on retirement, you get a cheque from the scheme. This cheque should have accumulated interest based on your annual payments over your years of work, and is supposed to benefit you in your years of retirement.

There have been challenges in implementation, but it targets a higher level of benefits to beat the poverty that comes with old age in some cases.

Occupational Scheme: This is a retirement benefit scheme that companies create for their staff. If you work at a company with this kind of scheme, there will be monthly deductions on your pay slip to the scheme. Your employer will award you a cheque with an accrued interest of annual savings on your retirement.

Should you leave employment before you retire, you can get half of your projected retirement benefits from the scheme, and the remainder paid at age of retirement, which is normally 55 years. This is referred to as a withdrawal benefit.

Social Welfare: Your personal savings plan can also have a retirement benefits and other goals-based saving you might want. This is a customised package that you can create with your insurer. It can include some of the following:

Ill-health benefits: If you fall ill and cannot continue to work due to illness or disability, you get a financial benefit if you subscribe to this insurance package.

Emigrate Benefits: If you leave the country without an intention to return, you can also get your full benefits with this kind of package.

Pension backed mortgage: You can get mortgage financing of up to 115%, against your pensions. Not all retirement benefit schemes offer this though. 

Post-retirement medical: This benefit allows you to be worry free of any old age ailment. It allow you to purchase a medical cover for the remainder of your life (20–30 years from retirement) based on your accumulated pooled resources. 

Life Insurance: This is one of the most well-known insurance options. This insurance covers your loved ones should you die or suffer disability. Some banks and employers offer this to their customers and employees.

It is a good cover to have because it protects a family should it lose a breadwinner. Also, when it has other riders such as critical illness cover; it helps to cover costs in hospital as well as other post-hospital care such as physiotherapy and other treatments.

Factors you should consider when picking a retirement benefit scheme

Ideally, you should have an insurance broker or financial advisor, but you could take time to understand the market and make the investment decisions on your own. This kind of information is now public. The Retirement Benefit Authority (RBA) has all this information on their website. They provide a list of all the certified and registered providers and their annual returns. 

For the layman who does not fully understand financial jargon, where is the best place to start? 

1. Start at RBA or Insurance Regulatory Authority (IRA), they are both hands on regulators who actively fight to protect the consumer.

2. Visit their websites (www.rba.go.ke) and (www.ira.go.ke) and check the list of registered retired benefits schemes, insurance brokers respectively and annual returns of the providers.

3. Identify a company that is of interest to you and consult an insurance broker or someone you trust to refer you to a broker or financial advisor.

a. Never go to an insurance company directly, their main focus is a sale – an insurance broker is the voice of reason, he cares about your financial goals and will direct you to the insurance company that suits your financial plans best.

b. An insurance broker provides advice, and some insurance brokers  have a “no secrets” policy which means that any money that a broker receives as commission of sale from an insurance company should be disclosed to you.

c. Note, it is your broker or financial advisor who will stand up for you in situations where claims are in dispute.

d. Ensure that the information you receive from the insurance broker or advisor is balanced, meaning they should give you the good and the bad and show you various options available to you.

What are the factors one should consider when listing beneficiaries of their insurance?

First there is a difference between a dependent and a beneficiary

A beneficiary: Someone you have chosen to receive an assigned financial token from your insurance policy. This could be a sibling, a parent, spouse, friend or cousin.

A dependant: Someone who relies on you, such as a child. 

These are the factors you should consider when selecting a beneficiary:

1. When listing your beneficiaries, first ask yourself if you were to die tomorrow, who would suffer; lack a meal, school fees or a roof over their head?

2. Who doesn’t have a backup plan and to what extent are they dependent on you?

3. It is normally advisable that if you have children, the younger ones should ideally get more money than the older ones because they will be dependent longer.

4. Look at your entire investment portfolio as well, you can evenly share your insurance policies and financial investments if you have a diverse portfolio.

5. Insurance policies only recognise one spouse. If you have a dynamic marital situation, you need to do the necessary legal disclosures early to reflect this in your insurance policies 

FINDING A BROKER

1. First visit the IRA website or offices for a list of brokerage firms.

2. Pick your ideal brokerage firm.

3. Find an individual you trust or one referred to you by someone you trust from your brokerage firm of choice.

4. Have a lengthy discussion on your desired financial goals, focusing on the wealth you would like to create and grow.

5. The insurance broker then does his/her research in the market, based on what your needs are, and provides you with insurance packages with the pros and cons of each.

6. You then make your decision and pay your insurance policy.

7. The broker should not charge you anything, because they should receive a commission from the insurance company you purchase insurance from.

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LESSONS ON INVESTMENT FROM ROSE MUIU

Rose Muiu, 46, was only 12 when she was introduced to investment by her grandmother, Eva Mumbua. That was back in 1982, Her family had gone through a terrible financial crisis following an accident that incapacitated her father. Rose and her younger siblings moved in with their maternal grandmother who lived in Korogocho slum in Nairobi. Her grandmother had bought land and built mud and iron sheet houses for rent in the slum.

“Her tenants would bring her money every end of month – I was really impressed,” She recalls.

On graduation from High School in 1988, Rose’s parents could not afford her university tuition. Her grandmother suggested she help out one of her uncles in his business. He sold jackets, which went for Sh500 a piece. The agreement was that her uncle would pay her a 40 per cent commission on each sale. He would often direct her to his friends, a guaranteed sale sometimes. Rose would sell an average of two to three jackets daily.

When she had saved a bit, her grandmother advised her to buy land. Her first purchase was land in Ruai, in the outskirts of the city centre, for Sh18, 000 in 1988. She was only 18-years-old then. She paid for the land in nine monthly installments of between Sh1,500 and Sh2,000 from the money she earned hawking jackets.

Three years later, Rose got a full scholarship to study for a degree in Theology at Wiedenest Theological Academy, a Bible College in Germany. Her scholarship entitled her to monthly pocket money the equivalent of 70 Euros, about Sh7, 822, which she would send home for her two younger sisters’ upkeep.

On her graduation in 1993, she returned home with Sh40, 000 she had saved and resumed her investment in land. She started with five acres in Emali, Makueni County. 

“I found land owners who were willing to allow me to pay in installments of up to two years,” she says.

Since then, Rose has continually bought and sold land across the country.

In 2004, she sold some acreage of her land for Sh250,000 at a quarter an acre, at a 500 per cent profit. She then used that money to buy land in Jamhuri Estate, Nairobi County.

On the land that she bought in Jamhuri, Rose built flats without needing to seek credit from a bank. She relied on the sale of appreciated pieces of land that she had bought over time.

Rose also runs Real Stars, a non-profit that rehabilitates and educates street children. The money she raises for her charity goes straight to the children’s education and upkeep. Her rental property in Jamhuri Estate is what pays her. She currently gives talks across the city on financial investments. 

ROSE’S INVESTMENT PRINCIPLES

•  Tithe 10 per cent of your income first.

•  Save at least 20 per cent of your income.

•  With land as an investment; start small with the land further from the city with potential of appreciation in value, and slowly buy and sell inching towards the city.

•  Land is a long-term investment; value appreciates over time, not instantaneously.

•  Everybody has something in their hands, you can invest with whatever you have, however small.

•  Visit and scout potential lands in rural counties, there is much more potential there.

•  Begin now, with what you have.

•  Surround yourself with like-minded people and keep seeking new investment options.

•  Diversify investment – do not just invest in one area.

•  Avoid banks as much as you can – even with a fixed deposit account, your return on investment is painfully low.

•  Never steal from the government, pay your taxes faithfully.

•  You can buy land for as low as Sh30, 000 for an acre across Kenya, scout it, see the potential of the land and purchase.