High cost of deferring retirement savings

By John Oyuke

Saving for retirement is the most difficult decision for some people, especially those in the informal sector and the newly employed.

With demands of daily sustenance, and the need to enjoy the youth high on everyone’s priority list, it is easy for workers to defer saving for retirement.

However, according to Mr Brian Rop, a risk and pensions manager at Liaison Group, saving for retirement — no matter your age — is essential.

"Putting money into a retirement plan regularly is one of the best financial habits any person can start at a young age," he told Financial Journal adding that: "One can start a savings habit without having to make the investment decisions."

"The most important guideline on how to save for retirement: Start early. It is the best way to get the maximum result from the minimum effort contributed to the process," he says.

Mr David Ogega, an actuarial officer at Jubilee Insurance Company, says to live well in retirement, one should stop relying on employer pension plans, but also join individual retirement schemes, with the objective of saving enough for retirement.

Current consumption

Rop says the purpose behind all economic activity is consumption and that saving is the sacrifice of current consumption for the purpose of creating wealth for future consumption.

He advises the youth to consume less so they can save enough for future consumption.

He says this is where many Kenyans, especially the youth, fail by either buying a car or renting an upmarket house or spending lavishly on entertainment.

Informal sector

"The youth should be risk takers, they should put 20 per cent of their income in conservative investment and 80 per cent in risk-based investment," says Rop pointing out that conservative investment and risk investment approach is inversely related.

Rop says if you are 25 years old, you might not think it matters much whether you start saving now or next year. But by the time you reach retirement, the cost of procrastination can be huge.

For example, he says, a 25-year-old person who sets aside Sh2,000 a year in an individual pension plan that earns a seven per cent return will hypothetically build a nest egg of Sh427, 219 by the age of 65.

But if this person delays saving by just a year, it would be worth about Sh30,000 less.

According to statistics, more Kenyans are employed in the informal sector than the formal sector, with the informal sector accounting for 77 per cent of total employment.

Unique features of the informal sector include irregular income, high business turnover and frequent job mobility, which mostly affects the youth, hence making setting up of sustainable retirement schemes in the sector difficult.

Individual plan

In this regard, four factors are said to make individual retirement schemes suitable retirement saving avenues, and in particular the youth and the informal sector.

First, they are open schemes that take little regard of an individual’s employment, which favours job mobility and continuity, and secondly, contributions made to the scheme are flexible enabling people save comfortably in accordance with their own ability.

Thirdly, individual retirement schemes are also wide spread providing a convenient channel for retirement saving for many un-reached Kenyans.

Fourth, there is no administrative cost since the administration is entirely transferred to the appointed agent/administrator who gets fees from the individual pension plan providers.

Thus, according to Rop, individual retirement benefit schemes offer the greatest potential in increasing the current dismal coverage of the retirement benefits industry.