Retirement rarely crosses the minds of most young people. Probably because of the belief that it's too far into the future, and life will align itself in the years to come.
Prior planning is ideally the way to go when it comes to preparing for your retirement. It can cushion you from the adverse effects of old age when there is no source of income.
The life expectancy rate in Kenya is 67. What this means is that majority of Kenyans will live to the age of 67. The official retirement age for private-sector workers is 55, and for government employees is 60.
With the uncertainty around getting and keeping a job along with the volatility of business performance, whatever contribution you will have made in the event of a job loss or collapse of a business, will continue to earn interest and therefore leverage on the power of compounding.
If you are in employment and are part of a retirement contribution scheme, you can opt to increase the minimum limit offered by your employer. Do not even think that your contributions to NSSF will adequately sustain you when you retire. You definitely need another pension plan.
Retirement comes with somewhat unforeseen challenges including medical expenses and taking care of the younger generation. It is important that you ensure you have assets that generate enough cash to sustain your lifestyle and health.
Do keep in mind that past the age of 64 years, most health insurance companies will not give you medical cover. What this means is that in the event you fall sick or need to have a medical procedure done past this age you will have to pay in cash.
Advantages of building a pension fund
- Up to 60% of your pension contributions can be used to secure a mortgage: With the vast majority of people desiring to own a home, having a solid retirement fund could finance a mortgage and enable you to own a home.
- Tax relief on contributions for those in employment: The Kenyan government offers tax reliefs for those who opt to have a retirement contribution plan.
- Peace of mind when you are in your old age: You do not have to worry about cash flow challenges in your sunset years.
What to consider when joining a retirement scheme
Consider what you would want when you retire. An income drawdown? An annuity? A lump-sum payment?
An income drawdown is where you invest a lump sum of your money (ideally your savings from a retirement scheme) as soon as you retire, with an insurance company. The insurance company then allows you to withdraw a certain amount of money at a certain frequency; monthly, quarterly, bi-annually, or annually. The frequency is determined by you.
A drawdown also allows you to withdraw a large sum of money if you need it for emergency purposes. According to the Insurance Act, the minimum period for an income drawdown is 10 years. You can begin withdrawing your income immediately after joining but you will have to be part of the fund for at least a decade. The law also only allows you to withdraw up to 15% of your account balance annually.
An annuity on the other hand is where you deposit a sum of money, with an insurance company and enter into a contractual agreement with them, where you receive periodic payouts as income over the course of your life. This ceases upon your demise.
With both income drawdown and annuity, upon the demise of a retiree, the benefits are passed on to your beneficiaries.
Flexibility in amounts contributed throughout the period
You want to join a scheme that gives you the option to increase or reduce your contributions throughout the years, depending on the changing circumstances of your financial situation.
Compare the administration charges across different pension plans providers, as well as the rate of return they are offering. Most schemes offer a minimum rate of return of 4% per annum. If you can get one whose average over the last 10 years is slightly above this rate, you can opt to go with it.
In some schemes, you can convert your Safaricom Bonga Points into your monthly pension contributions. All the accumulated Bonga Points at the end of every month can be converted into money then used to pay for your pension.
Some companies that one could look into include but are not limited to; ICEA LION, Britam, CIC Insurance, Jubilee Insurance, Old Mutual Insurance, and Liberty Insurance. All these firms have a personal pension plan where you can join and contribute a minimum of 1,000 Kenyan shillings per month towards your retirement.
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Do not forget that as much as you save for the unforeseen future, it's important to ensure your health is in check. You want to ensure that, as you age, your body remains in good shape. So remember to exercise, eat your veggies and fruits, and lead a stress-free life so that you cut down the risk of getting diseases in your old age.
