Sundeep Raichura is the CEO of the Alexander Forbes Group in Kenya, the leading provider of actuarial, consulting and pension administration services in East and Central Africa.
He is a pension and retirement expert, having worked at the company for 20 years and has been awarded for his individual outstanding contribution in the pension industry.
Don’t be old and broke
Tenessee Williams said, “You can be young without money but you cannot be old without money.”
When you are young, you still have the energy, so you can work and get money but it is more difficult when you are much older.
If you work for 30 years, you will get 360 pay cheques. Those 360 paychecks need to support an equivalent of another 360 pay cheques – another 30 years in old age.
If you say it is a struggle to save because you have more immediate priorities, can you imagine how much more difficult it will be when you have no income?
The retirement years should be the golden years of your life, to do the things you have always wanted to do.
If we do not plan and save for retirement, it can be a very miserable time. It is like being thrown off a conveyor belt – you were earning, then all of a sudden, you do not have anything to do.
You can be in for a rude shock, having thought you had enough money.
If you have not started, start now, because it is never too late to start saving for retirement, but more importantly, it is never too early.
What sort of lifestyle do you want when you retire?
Most people would want to enjoy the same lifestyle in their retirement that they were enjoying before retirement. Therefore, ideally you want a benefit or a pension or income in retirement that is similar to what you were earning before.
In pensions jargon we say you want to target a particular replacement rate.
To maintain the lifestyle you had, a desirable target is to target 75 per cent of your pre-retirement earnings.
We target 75 and not 100 because hopefully your direct expenses will decrease when you retire, for example you no longer need to travel for work, hopefully your children have grown up, you pay less taxes as a pensioner because pensioners enjoy preferential tax treatment, and you no longer need to save for retirement since you’re already retired! So 75% is a good target.
So that is 75% target replacement of your earnings.
What is your retirement age?
The earlier you want to retire, the more you need to have saved. If you retire early, you will need the money for a longer period.
Secondly, your money will not have had enough chance to grow because you will access it earlier.
Based on lifestyle and the age you want to retire, ask the question, “How much capital should I accumulate? In order to accumulate that capital, how much should I save now during the period I am working?” Then ask the question, “What can I afford?”
If there is a gap between what you need and what you can afford, see if you need to adjust your plan or you can try and somehow save more.
During that period you also need to monitor your plan. Keep checking if you are still on track, and if you need to, then course correct.
The power of compound interest
Say for example you want to retire at 55. If you start putting aside about 10 per cent of your money say at age 20, you have a sufficient chance of getting the 75 per cent replacement rate. If you start at 30, you need to keep aside 16 per cent of your salary.
If you start at 40, you need to keep aside 32 per cent. At 50 you’ll need 110 per cent of your salary, so it becomes impossible to save.
That tells you the power of compound interest. You need to let your money work for you. The longer you allow it to work, the better.
Ideally, you want that by the time you get to retirement, out of the money that you have saved, only 25 to 30 per cent should be your own money. The rest should be the be the investment return on your saving because you will have invested wisely and saved for a long period
Don’t break into the vault
That money saved up belongs to the older person you will become, when you will no longer be able to work.
Even when you change jobs and are in a pension scheme, don’t be tempted to access your money. Even if you change jobs, transfer it to your new employer’s scheme or keep it in a personal pension.
Spending it is just like embarking on a long distance journey with an empty fuel tank, it can’t work.
You can use a ‘do-it-yourself’ approach if you are financially sophisticated.
Otherwise, you should get financial advice on how much you need, how you should invest your money, how to put your money in a proper pension plan – for example you can get tax advantages to save in your pension plan.
Get proper advisers. Do not fall for pyramid schemes and things like that.
Take advantage of pension scheme regulations
All pension schemes in Kenya are regulated by law. There is legislation and there is a regulator, so pension schemes are very good and safe ways of saving.
You also get the tax benefits. So if you are able to put aside Sh 20,000 a month yet you do not, you are giving the taxman sh 6,000 every month because pension contributions are tax deductible to certain limits.
The investment income is tax exempt. When you get the money out, it is also taxed favourably.
The three big funds
You need to think about not only getting an adequate amount at retirement, but also an emergency cash fund and a post-retirement medical plan.
Almost 60 per cent of your total lifetime medical spend is likely to be when you are above 60.
Be part of the one per cent
The statistics are quite frightening. If you take 100 Kenyans who are aged 40 now, by the time they reach 55, almost 90 per cent will either be forced to continue working or will be reliant on their families for support.
A very tiny fraction, maybe 5 per cent will be OK, and only 1 per cent will be comfortable in retirement.
The young will say retirement is a long way away, but what we do not realize is that we are ageing every day.