By Michelle Nyandiko
Most Kenyans look forward to a comfortable retirement after at least four decades of working and accumulating enough wealth to live on after retirement. According to research by leading pension provider Enwealth Financial Services, 98 percent of working Kenyans expect to live at the same or better standard of life in retirement.
However, without adequate retirement savings, many Kenyans are increasingly being forced back to working live past the retirement age of 60 because they cannot financially afford to live comfortably in retirement.
Right from lack of awareness on pension products to adequate funding towards retirement, it became apparent in 2009 when the government raised the retirement age from 55 to 60. The reality is that most people have very little in their savings accounts and they are not coming even close to putting aside long-term savings for income replacement in retirement.
Whether it is because they did not accumulate enough savings in their nest or because they unwisely wiped out their money and neglected to save anything, the decline in standards of living for many during their sunset years is an ominous development. Unless one gets lucky and wins a jackpot or inherits riches from a wealthy relative, most Kenyans will probably not have enough money saved or invested to finance a full retirement.
Given that the cost of living will continue to rise due to occasional high inflation, increased taxation, inaccessible housing costs and mortgagees coupled with increasing unemployment and wage growth declines, expectations for a decent lifestyle in retirement will drain savings and retirement accounts faster than anticipated.
It takes a solid grasp of a budget coupled with a carefully considered investment and spending plan for life savings to retire comfortably. With that in mind, here are some signs to critically ponder on before one considers retiring.
Living from paycheck to paycheck without a plan on how to break the cycle goes hand in hand with not having adequate savings and drowning in debt. If one continues to meet all financial obligations with current earnings from one pay cycle to the next without finding ways to build up a buffer between earning, they will never withdraw from active working life.
Finding ways to track expenses, spending less and generating more income has to be a priority each day. Depending on the situation, one should consider picking up more hours at work in cases where employers incentivize for extra hours. Starting up a side hustle or learning a skill that can bring in extra cash should always be top priority.
Debt is a major reason why many people find it very difficult to retire because it involves paying for past expenses while managing current expenses. Financial planners advise that carrying debt into retirement is a dangerous move that can imperil one’s financial future and drain their retirement savings. Paying down debt before retirement should be a priority even if it requires one to remain in active employment for more years than planned. If the goal is to comfortably retire, one should strive to pay off all debts in a timely manner and avoid going back into debt at all costs.
Lack of long-term financial planning. When one retires, monthly salary stops but expenses remain the same or grow. Thus, it is important for one to map out expected monthly cash flow before retiring. With the future uncertain, financial planning means analyzing categories of expenses such as healthcare, travel and recreation based on current spending habits. This enables one to have a solid grasp of expenses, to know how much income they will need, to understand how long their savings will last and what spending level is required of them to maintain savings over the coming decades.
Not Accounting for Inflation. Inflation is the rise in prices of goods and services which gradually reduces the purchasing power of the money a person holds. When the average inflation rate increases, things get more expensive. This affects daily expenses and consumes savings faster. Overlooking the effects of inflation is one of the most common retirement planning mistakes and can have serious long term consequences if not properly accounted for. Therefore, when determining annual retirement budget one has to factor in cost-of-living adjustment to ensure sufficient retirement income to meet required expenses.
Retirement is a major life transition that requires ample preparation and planning before exiting from the workforce. If one discovers that they are not fully prepared, they can address the problem by engaging a financial advisor to create a financial plan that will help them pay down debt, know how much income they will need during retirement and properly re-balance their portfolio.
The author is a Pensions Manager at Enwealth Financial Services