Plan for retirement on day you are hired

Despite being one of the most important components of an individual’s financial plan, saving for retirement is mostly the least of one’s priorities or is not even considered at all.

Kenya’s pension penetration is at a mere 20 per cent: for every 100 people, 80 do not have anything to fall back on in their sunset years. Most of the former are in a retirement arrangement by virtue of being employed in the formal sector.

And they can only replace 34 per cent of their earnings before they retire, against a recommended 60-80 per cent.

If one earns Sh100,000 per month, their retirement pot will give them Sh34,000 per month. The sudden drop in earnings is sure to cause numerous unwelcome shocks.

Unlike the 1960s, ’70s and ’80s, there is no assurance of children taking care of us in our old age.

These statistics paint a grim picture for the employed dreamers and condemns informal sector workers to a tougher sunset. The six-million-dollar question is, can we avert this sleepwalk to disaster?

PENSION PLAN

There is no one-size-fits-all method and everybody must make their own financial plan based on individual circumstances and goals. For those in formal employment, it depends on what you envision.

If you have an employer-sponsored pension plan, understand your benefits and make additional voluntary contributions into your pension arrangement — from as low as one-two per cent of your income.

An alternative is to join an individual pension plan (IPP). This typically gives you more control over your pot in terms of amount and frequency of contributions.

Some IPPs may even allow you to choose the manner in which you want your pension monies invested — ranging from conservative (risk-averse) to aggressive (risk-tolerant) investing.

The second strategy is to preserve your pension benefits. This means keeping your pension pot intact every time you change employers.

Current regulations allow one to access a significant portion of one’s savings on leaving an employer (one can access 100 per cent of their own contribution and up to half of the employer’s).

RETIREMENT PACKAGE

But despite the temptation to use these funds to meet your current financial desires, the more responsible action is to leave them intact.

One can preserve these benefits in the respective employer schemes or consolidate all the different savings into one IPP.

For those without formal pension arrangements, whether in NGOs, SMEs or MSMEs, and in the mass informal sectors such as farmers, boda-boda riders and private security guards, the most important step to take is to start saving for retirement immediately.

It is never too early to secure your financial future. And the longer you save, the more interest you earn.

For example, take two individuals, if a 25-year-old and a 35-year-old each consistently saves Sh1,000 monthly in a pension plan giving an average return of 10 per cent per year, at 60, the younger person will have a corpus of Sh3,439,816 while the older one Sh1,326,627 — less than half his junior.

The power of saving for a longer period and the effect of compound interest is, thus, key to maximum return on savings.

Mr Otenyo is an enterprise solutions and partnerships consultant at Zamara Group. [email protected].