Dear Entrepreneur, How Often Do You Think About Retirement?

How often do you think about retirement? Do you think planning for your retirement is important? Which retirement scheme are you aware of if any?

These are some of the questions that were addressed in a recent countrywide study by the Association of Kenya Insurers on Retirement Preparedness. It is interesting to note that out of the respondents who were planning to retire, only 30 percent in the age group of 55-65 years considered themselves ‘very much prepared’ to retire.

The study went on to ask respondents not saving in a pension scheme the reasons for not doing so and the three key responses were:

Insufficient income,

Lack of savings, and

Lack of financial advice

Retirement readiness refers to the level to which one is prepared for their retirement with a focus on the extent and ease one may be able to cover expenses in their post-retirement years. This level varies from one person to another dependent on income and needs.

Many financial experts however say you will need about 70 to 75 percent of your income before retirement to maintain the same standard of living after you retire.

Retirement readiness, therefore, is not only about saving for old age but involves putting aside sufficient savings. To achieve the desired level of retirement readiness, retirement planning is key. If you are already a member of a pension scheme, you are on the right path to achieving the desired readiness.

What then is Retirement Planning? Retirement planning entails laying out a financially doable plan to achieve the ultimate goal of a comfortable retirement. The first step is to fully appreciate the fact that you will not be able to work for the rest of your life hence you may not always have a reliable income for the rest of your life.

The next step is to actively explore ways in which you can save towards ensuring that in retirement you have sufficient income to cater for yourself without being a burden and without any strain. This step should be taken with a lot of awareness taking into consideration your income replacement ratio which is a measure of the extent to which your post-retirement income replaces your earnings before retirement.

Read more on the income replacement ratio in our previous article here.

Retirement planning and subsequent readiness do not necessarily mean saving in a pension scheme. There are various ways through which one can invest save money in general and these include:

Real Estate – High purchase of land for speculation or building and buying houses for leasing or business,

Insurance Policies,

Unit Trusts,

Shares,

Opening savings accounts with various banks, and,

Chamas – Very popular due to the ease in accessibility of funds and loans

Despite the above options being viable, when it comes to saving for a long term period such as for retirement, pension schemes are viewed as the best option for several reasons.

The first reason is that one can make tax-exempt contributions to them. Secondly, a contributing individual to a pension scheme can use their pension savings to purchase a house or assign up to 60 percent of their savings to guarantee a mortgage – this way, a pension scheme can cater for two needs in one account.

Lastly, savings in a pension scheme earn a compounded interest that is not taxed until the point of withdrawal.

The above said one ought to be aware of the features and benefits of the different retirement schemes in the country, how to choose between the schemes and alternatives to saving in pension schemes. The three key steps here are:

Analyze your monthly income and budget,

Talk to a financial professional or advisor, and,

Commit!

Ultimately, achieving the desired level of retirement readiness requires one to embark on a long journey of delayed gratification and savings discipline in order to have a comfortable, stress-free retirement.

Consistency in saving and leaving the savings untouched are encouraged in order to achieve the highest amount of retirement benefits when the time finally comes.