Important. Opening a personal pension scheme is ideal for a start if you are currently not a member of any pension scheme. The beauty of a personal pension scheme is that they are very easy to set-up, and contributions can be received anytime, not necessarily monthly, writes Joy Kareko.
The current income replacement ratio for East Africa’s biggest economy – Kenya is below 40 per cent.
This means that a Kenyan who is earning a salary of KShs60,000 (Shs2.1m) during his last working month will be earning a salary of KShs24,000 (Shs840,000).
Income replacement ratios for countries such as Canada and China are about 53 per cent and 83 per cent respectively, according to a 2016 report, with the highest being Croatia at 129 per cent.
If Kenya becomes like Croatia, a Kenyan earning a salary of about KShs60,000 will earn pension salary of about KShs140,000. Retirement would be so enjoyable, majority of Kenyans would make early retirement an option.
Unfortunately, that is not the case. Most people have to continue working hard even after retirement to feed their families daily. But that does not have to be the case always. Here are six things that you can do to retire well.
Set aside money for retirement
Opening a personal pension scheme is ideal for a start if you are currently not a member of any pension scheme. The beauty of a personal pension scheme is that they are very easy to set-up, and contributions can be received anytime, not necessarily monthly. They are ideal for business people and other individuals whose employers have not yet started a scheme. Personal pension schemes are also useful for consolidating pension benefits from previous employers since these cannot be cashed out before attaining age 50 retirement age.
Save more money
This can be done through additional voluntary contributions. Pension providers such as Enwealth provide members with online tools to track savings project the future value of savings and get quotations showing how effectively their accumulated pension would replace their salary at retirement. Through such resources, one is able to tell how much they will be earning at retirement in the form of a regular pension.
According to our research, an individual contributing 10 per cent of their salary to a pension scheme is likely to achieve an average salary replacement rate of 51-55 per cent of their pre-retirement salary in the form of a pension at age 55 years.
It is therefore important to increase your contributions giving priority to increasing your pensions income as you grow older.
Start now not next year
The hardest bit is starting, then the consistency. Simple ways that can help you with consistency include putting up standing orders at the bank for say, every fifth day of the month, for the bank to debit a certain sum of money.
This automation not only eases up the payment process but it’s also a decision you have to make once and it is done unless you decide otherwise. Other easy options are mobile money payments, and direct bank transfers.
Avoid making withdrawals
Instead, consolidate those funds through a personal pension scheme for ease of access in the future.
This will help you grow your pension gradually. Unless it is completely necessary, you can say no to instant gratification and have those funds continue earning interest.
Go for mortgages
About 60 per cent of your pension savings can be used as collateral for a mortgage which you will be able to pay off over time, so that at the time you retire, you already have a home of your own. A recent study showed that most people use their pension lump sum to buy a home which should not be the case. Proper planning can help you own a home before you even retire.
This means you attend the AGMs and the member education forums organised by your employer and scheme trustees. Knowledge is power. Being proactive about this will help you become more informed for example about options you have now, or even at retirement.
Properly planned and carefully managed, your income floor — a foundation of pensions, annuities and Social Security — may have the ability to provide guaranteed income you cannot outlive and be considered a source of income to cover your essential expenses during retirement.