How can I get the financial wisdom to retire in comfort?

Saving for one’s retirement is the most important component of your financial plan. FILE PHOTO | SHUTTERSTOCK

I want to have the ability to retire comfortably, something my generation has often given up on. I want financial wisdom and skill, but I have no idea whom to ask.

Saving for one’s retirement is the most important component of your financial plan. Despite this fact, it is one of the least of the average Kenyan’s priorities, if considered at all.

Statistics now more than ever paint a grim picture of retirement preparedness in the country. A quick run through them informs us that pension penetration is about 20 percent, this means that for every 100 people, only 20 of them have something to fall back on in their sunset years.

Further interrogation will see that the informal sector is all but uncovered despite having 80 percent of the jobs and contributing a further eight jobs for every 10 new jobs that come about today. This number is surely set to rise.

For us to determine how best to get to a comfortable and even prosperous retirement, we must first determine the quality of life we would like to live in retirement.

We must also be cognizant of the fact that, unlike in the 60s, 70s and 80s, we do not have the assurance that our children will take care of us in our old age. This is unlikely to get better as we move further into the decade.

Secondly, attaching a monetary figure to your retirement goals further brings it home and points us towards having these goals be S.M.A.R.T (Specific, Measurable, Achievable, Relevant and Time-Bound).

Read: Clever things Kenyans are doing to plan for retirement

As an example, if one earned Sh100,000 per month by the time they retired, then their intention should be to maintain the same income through retirement or earn as close to that figure as they possibly can to ensure a seamless transition into their golden years.

The global recommendation for such an individual is that they should have saved enough in their retirement pot to allow them to receive between Sh60,000-80,000 monthly or in other terms, allow them to replace between 60 percent and 80 percent of their last income.

This is what we call the income replacement ratio (IRR), the higher this figure, the more comfortable you will be in retirement.

Now that we have the end game sorted, it is time to look at the how. Thankfully, there are a number of ways to save for retirement in Kenya.

If you’re in formal employment, then chances are you are on some form of social security arrangement, with the most basic being NSSF.

Competitive packages

To top this up, employers today have some pretty competitive employee benefits packages that are sure to set you on your way.

It is of course always advisable to top up on this with Additional Voluntary Contributions to ensure that you are within the recommended IRR level.

The current IRR rate in Kenya is 34 percent even with formal coverage hence more effort must be put in to ensure you are comfortable in retirement.

For those without formal pension arrangements, whether in NGOs, SMEs or MSMEs and in the mass informal sectors such as farmers, boda boda riders and private security guards, the most important step to take is to start saving for retirement immediately.

There are a number of Individual Pension Plans that will help you achieve your goal. Some are even geared towards helping those with irregular earnings cycles save daily and still secure their retirement.

Read: What tricks can I use to save a lot of money this year?

It is never too early to secure your financial future. And the longer you save, the more interest you earn. For instance, take two individuals, if a 25-year-old and a 35-year-old each consistently save Sh1,000 monthly in a pension plan giving an average return of 10 percent per year, at 60, the younger person will have a corpus of Sh3,439,816 while the older one Sh1,326,627 — less than half his junior.

The power of saving for a longer period and the effect of compound interest is, thus, key to maximum return on savings.

Mr Otenyo is a consultant on retirement solutions. | [email protected]