Retirement is coming, how secure are you financially?

Many Kenyans are struggling through their sunset years without an adequate income because they did not prepare well. Photo/FILE 

Ms Mary Wamathai had a “bitter retirement.”

The saga begun when she was first employed as a teacher in 1978.

A miscommunication saw the government add two years to her age. So when she was ordered to retire in 2007, it came as a surprise.

“I wasn’t ready. I had loans to pay and all my investments had been lost when my husband and I separated,” she told Money from her Limuru home.

Barely five years after that untimely retirement, she has gone through her pension lump sum payment of Sh800,000 and is hard pressed to support her family on a meager Sh8,000 monthly stipend.

Ms Wamathai is not an isolated case. Millions of Kenyans struggle through retirement without a steady, adequate pension income.

Outliving one’s productivity has not been of major concern to Kenyans in the past, given the low life expectancy and the social protection provided by cultural norms.

However, the over 55 life expectancy has been rising over the last decade. A breakdown of traditional extended family units has further made it harder for retirees to live comfortably.

Despite these, only about 20 per cent of Kenyans have pension plans, with most of them being in formal employment. 80 per cent of the country’s population is not secured for life after employment.

Industry analysts point out that even the existing pension plans leave a lot to be desired.

To sustain a comfortable lifestyle, retirees need to maintain a monthly income that is at least 33 per cent of their monthly income during employment.

“Pensioners are lucky if their retirement income is 25 per cent of what they made during employment,” said Mr Lazurus Muema, former chairperson of the Retirement Benefit Schemes Association and current HelpAge Kenya treasurer.

The manner in which pension money is doled out plays a critical role in determining its sustainability. The industry classifies pension plans into provident schemes and pension schemes.

Provident scheme holders usually receive a lump sum while pension scheme members receive a monthly stipend or a combination of a lump sum and a monthly stipend.

According to financial experts, money acquired through the provident scheme is easier to squander.

“The risk of facing an impoverished old age remains very real should the retiree mismanage the single lump sum payment,” said commercial lawyer, Geoffrey Odongo.

Although Ms Wamathai’s pension scheme gave her the option of a monthly annuity, the Sh800,000 lump sum disappeared

Employees are also increasingly withdrawing their pension funds early in a disturbing trend that is exacerbating the situation.

Data collected by the Retirement Benefits Authority (RBA) indicates that in the six months ending June 2011, withdrawals from individual benefit schemes totalled Sh1.3 billion; double the amount withdrawn the previous year.

The massive withdrawals were occasioned by tough economic times and a relaxation of government preservation rules that made it possible for scheme members to access 50 per cent of their employer’s contributions.

If the money withdrawn is mismanaged, thousands of people could find themselves in dire straits come retirement.

“They withdraw this money early, rationalising that they can invest it better. However, when given large sums of money, most people do not make the right investment decisions,” said Mr Muema.

Even among those who wait until retirement, pension payments can sometimes go into paying heavy loan and mortgage debts.

“I have a loan of Sh70,000. I have to figure out how to pay it because I don’t want to carry it into retirement,” says Ms Margaret Koome, a civil servant contemplating on retirement.

Faced with this grim retirement outlook, what can the average Kenyan do to better his or her situation? According to industry players, a lot.

For one, retirement planning ought to start the moment one begins to receive an income. Employer-sponsored pension plans will often kick in automatically. Because of this, most employees tend to neglect retirement planning.

“Any person above 18 should start thinking about their retirement plans early in life, regardless of whether they are employed with a stable source of income or not,” reads a statement by Zimele Asset Managers.

Upon drawing this plan, many employees often find that the money they stand to receive in an occupational retirement benefit scheme is not adequate to fit their ideal lifestyles.

Individuals may boost their retirement savings by making additional voluntary contributions into personal pension plans, in addition to their employer’s retirement benefits scheme.

According to Zimele, contributing to pension schemes above and beyond what employers provide could save the scheme member a tidy sum, thanks to Kenya Revenue Authority tax benefits.

For those in the informal sector, the Retirement Benefits Authority (RBA) has introduced a number of investment vehicles.

One of these is the Blue SME Jua Kali (Mbao) Scheme, which requires members to contribute about Sh20 daily to participate.

Apart from participating in schemes, developing a personal savings and investment culture could go a long way in securing the sunset years.

Mr Muema advises individuals to look into investment vehicles that will provide passive income throughout retirement. These include rental property, stocks, bonds, and mutual funds.

“At some point during your retirement, you will no longer be able to move around and micromanage businesses. You should seek opportunities that will give you good returns with the least amount of interference,” he said.

In the case of stocks, people investing with retirement in mind should look for companies that have had a solid market performance over the last decade. They should also avoid investor panic during market fluctuations.

quickly in the face of household expenses and family needs.

“At the time, I was living with some of my children and grandchildren. I was paying rent and I was buying food,” she says.