Secure your income now for the benefit of your retirement years

 

By SUNDEEP K RAICHURA AND ANTHONY KILAVI

In Summary

• Before you stop working, you need to give serious thought to making your money work for you during your retirement years

Around the globe — and it is no different in Kenya — people consistently underestimate how much money they will need for their retirement years.

The importance of saving and investing throughout your working life — ideally for at least 30 years — simply cannot be emphasised enough.

Remember, you want your retirement nest egg to be big enough to keep you comfortable. Preferably, you want your pension to be as close to your final salary as possible. You also need it to last for the whole of your retirement.

Research has shown that the average Kenyan retiree is expected to have generated savings that will purchase a pension of only 22 per cent of the salary they were earning before they retired. This is a poor statistic, and the question is: “What are Kenyan retirees doing wrong?”

The mistakes to avoid in your retirement planning include starting to save too late, spending your retirement benefits when you change jobs, investing incorrectly during your working life, timing the stock markets, and not taking expert advice.

Many young people are more concerned about spending money on a fancy car and making ends meet than saving for their retirement.

This is understandable, but neglecting to save for retirement at an early age is a huge mistake. Contributions made earlier in life will have a longer time to multiply.

Instead of choosing a cash payout when you leave your retirement fund, try to be disciplined and preserve your retirement benefit.

This means that when you change jobs, you should keep it preserved (either in your current scheme, a new employer’s fund, or a personal pension plan) so that the lump sum saved and invested is not only untouched, but can continue to grow through appropriate exposure to investment markets.

A common mistake many people make is to invest too conservatively for retirement. It is true that over the short term, cash can be a safe investment. But you must remember that over the long term, cash returns cannot beat those of a balanced portfolio comprising shares and bonds.

Further, cash returns (over the long term) do not beat inflation by very much. Unfortunately, many people think that they can predict what will happen with the stock market and change investments in line with their predictions. Research shows that this seldom works.

Some retirement fund members adopt a do-it-yourself approach. However, an appropriately trained financial adviser can add enormous value, saving you from making costly mistakes.

Start consulting a financial adviser during your working life and continue to get professional help even after retirement.

The more you educate yourself about your pension fund and general financial matters, the more likely you are to achieve a retirement that is comfortable, secure, and free of money worries.

Sundeep K Raichura and Anthony Kilavi. Alexander Forbes Financial Services (East Africa) Limited