Ensuring an enjoyable retirement

 

Wananchi Sacco members at an AGM in Othaya town in 2012. The AGM is one of the best opportunities to raise questions. Photo/Joseph Kanyi 

With good planning and an investment strategy, you can look forward to your twilight years. Your overall objective is to have a nest egg sufficient to fund a fun packed retirement.

This objective should be broken down into targets that you aim to achieve annually and at set points in your life.

Your plan should comprise of your pension scheme as well as savings and investments (shares, bonds and property).

Along the way, you will need to adjust your portfolio as you see fit in order to keep on course. As you near retirement, you should shift your investments from riskier assets to safer ones (bonds).

If however you are falling short of your set targets, you should review your investment choices and determine whether you need to reallocate your assets.

It may be the case that you need to shift to more risky securities with greater growth potential. If you are not prepared to take on more risk in your investments, then the alternative is to increase your contributions to the pension fund or invest more (if you can afford to).

When reviewing your investments, it is important to take other factors into consideration especially the economic cycle and the time left to retirement.

The economy goes through cycles of accelerated growth and slowdowns, which impacts the returns your portfolio realises.

The closer you are to retirement the more cautious you should be because there is little time for your investments to grow especially if it coincides with a slowdown in the economy.

The key question everyone would want to know is how much one should save to ensure an enjoyable retirement.

Of course this will hugely depend on your retirement dreams. Presently 5 per cent of your salary goes towards your pension fund but this is most likely going to fall short of your required pension.

A rule of thumb is to save a number that is half your age. For example if you are 30 years, you should be saving 15 per cent and if 40 years, you should be saving 20 per cent of your income towards your retirement.

My advice to those with debt is to first clear the debt before you increase your contributions because the rate of interest on your debt is most likely higher than the rate of return on your savings/investments.

You should aim to retire debt free but if for instance you still have a mortgage, try to pay it off before retirement. This will free up your pension and provide you with a platform to enjoy your twilight years.

At the point of retiring, you will have to decide how to use your savings to provide you an income to live on just like the regular pay cheque you have been receiving from your employer.

The easier option is to buy an annuity where you pay a sum of money in exchange for a regular income till you die.

This is known as a secured pension. It provides a sense of peace and there is no need of monitoring the performance of your investments and wondering what to do next.

You would have a regular income, enabling you to put your mind to something else.

However, you may choose to use your pot differently and reinvest it in fixed income assets (bonds and income shares) to avail you a living income.

The plan would be to keep the capital invested and live on the interest generated

The third option is one where you live on your pension pot that your savings and investments have generated. This is known as income drawdown (unsecured pension).

The concern here is that you keep drawing your savings and with time they run-out leaving you with no funds to survive on. The pot also loses real value as inflation eats into its purchasing power.

The pensions sector is on the verge of liberalisation and my hope is that the process will not be rushed and there will be wider consultation.

As far as I am concerned, the key elements of importance are the safety of people’s pensions and educating the population.

For this reason, savers’ funds should be protected especially in the event of a provider being taken-over or becoming bankrupt.

In case of a provider collapsing, savers must be compensated up to a certain level of the money they would have received.

This can be realised with the creation of a pension protection fund which would be funded by a levy on pension providers.

Regarding the population, a greater number is financially illiterate. This means that a pension advisory service to educate the public and clear up misunderstandings is a prerequisite.

But let us not think otherwise, retirement should be an opportunity for one to enjoy and take on new challenges.

Hobbies like swimming, growing your own vegetables or volunteering at a local school is all fun as well as contributing to your health.

But for one to pick and choose what to do at retirement he/she must be financially independent and that is realised after many years of discipline and sacrifice.

Kenneth Atugonza MBA, MSc