Do you want to retire in comfort? Try a chama

Guests follow proceedings during the launch of a pension product by a local insurance firm last year. PHOTO | SALATON NJAU     

By TONY WAINAINA

Over 90 percent of Kenyans will experience a lower standard and quality of life post retirement. For many, retiring at 60 means using their pension savings to start a subsistence business that
can pay their basic bills at an age, when their physical and mental health has begun to deteriorate, equating to an increase in medical expenses.

According to a pensioners’ survey conducted by Retirement Benefits Authority (RBA) in 2003 and 2004, 89 percent of retirees at the then retirement age of 55, were dependent on family support. Their average income from their pension was equivalent to 20 percent of the income they were receiving when working. Only five percent were living comfortably. Even though the survey was carried out almost 15 years ago, the statistics are still relevant today, and if there has been any change it is probably for the worse.

Ideally, the Net Replacement Rate (NRR) — the average income you should earn from your pension after retirement should be 75 percent of your working wage. This includes your personal savings and investments, your company sponsored pension scheme and NSSF. In 2018, retirement fund administrators, Zamara, carried out an Income Replacement Ratio (IRR) (same as NRR) investigation for various defined contribution retirement benefit schemes covering over 60,000 members.

On average, it was found that members will receive a monthly retirement income equivalent to 34 percent of their pre-retirement income. The members of retirement benefit schemes aged between 25 and 35 are projected to have an average IRR of 42.6 percent at retirement. However, those aged above 55 are expected to have IRRs between 0 and 25percent, because they had not saved enough for retirement or started saving at a much later stage of their working life.

Inflation also has a profound impact on the buying power of our savings and investments. Using a 10 percent annual inflation rate, you would require Sh110 a year from now, to purchase the same goods worth Sh100 today.

Earnings from formal employment have a cushion from inflation through the periodic, usually annual, cost of living adjustment salary increments. Employers also supplement employee contributions. The 2003 and 2004 RBA surveys estimated that only 15 percent of Kenya’s labour force was saving through a formal retirement benefit scheme; leaving 85 percent percent without this form of protection against inflation.

After you retire, income takes a 100 percent direct hit from inflation, unless one shields it through income generating investments. This means every year, the purchasing power of one’s retirement income declines by the rate of inflation. One then asks, what amounts do we need to save now, to have a net monthly retirement income of Sh100,000 per month, when we retire at 60?

Based on a sensitivity analysis I have access to, a 25-year-old is expected to save Sh5,884 per month for 35 years. A 45-year-old with only 15 years until retirement, is expected to save Sh62,239. The model assumptions include an average annual real return (return after inflation) of 13 percent on the monthly savings. It also assumes that at retirement, one liquidates the investment and invest the capital in a risk-free asset like government securities, that are generating an annual return of eight percent.

The interest earned in this risk-free investment is Sh100,000; after tax. Our African sense of community and our over frail social welfare systems mean that most of us while paying for the education of our children, will also be supporting ageing parents and generally aiding extended family.

It is why in some circles, we are referred to as the sandwich generation. This limits the income we can set aside towards our retirement. With better diets and better healthcare, we can also expect to live longer, at the very least into our 80s.

More than ever, we need to find ways of pooling our savings to invest for the future and this is aside from taking up loans through our Saccos to cover education, healthcare and the purchase of productive assets and meeting aspirational needs such as a large car, and annual holidays.

I am inspired to reimagine what I believe is a very potent game-changer and wealth creator in our country, our region, our continent: the investment group or chama. We can use these social groups to pool our resources and channel them into savings and investing for retirement. Using the group structure — a combination of peer pressure, strength, confidence, and shared responsibility — we could harness domestic capital, creating domestic wealth.

There is no proven formula for sustainable wealth creation. However, some of the required attributes that cut across all of us, whatever our background or level of education, are hard work, courage, resilience, persistence, integrity and a well-informed risk appetite.

The writer is author, The Investment Group Handbook - From Chama to Conglomerate.