Financial planning for retirement in the different stages of life

We all need financial planning in life whether we are planning for a new car, to advance once studies, save more money, among other reasons. A critical financial planning element that many forget is saving for retirement.

How can we simplify the process from when we earn our first paycheque in our 20s to when we ultimately retire? Fred Waswa, the Group CEO of Octagon Africa, explains. 

The Savings Stage

The ages between 25 and 35 are critical foundation years because it is the formation stage where interaction with money happens. This is a point where many young people have finished their tertiary education and are joining the employment sector or starting businesses.

It is a stage where we put money aside for a longer period for purposes of supporting what you would like to do in the following stages of life. One should spread risks by using different saving vehicles such as SACCOs, investing in shares, fixed income assets like bonds and treasury bills, equity and money market unit trusts, life policies and most importantly a pension fund. At this age we have a high-risk appetite that we can afford to take up, therefore, one should not just put money in a bank, but consider vehicles that give you high returns.

Diversifying on savings plans cushions and allows you to save money, without touching on pension savings, for various short-term goals like school fees, buying a house or a car, medical cover for your parents or pursuing higher education.

Pension savings are very important because when started early, one can save small amounts of money over a long period which yields high returns. When one starts saving for retirement late, you are forced to put in a lot of money to be able to raise enough capital for you to be able to retire on.

At this stage, it is also critical for one to be visionary and seek knowledge of investments. Develop a saving culture from the first day you receive your first paycheque. The unfortunate thing is that people look at the past as being short and the future as being long thus thinking that saving can be done later and eventually never end up saving or start when it is too late. Remember it is better to live on an affordable lifestyle now and enjoy your retirement in future.

The Investment Stage

Ages between 35 and 45 is a very critical stage infamously known as the mid-life or social crisis. A mid-life crisis occurs when people discover they spent money on the wrong things, lost money on various ventures, relationships have gone awry with responsibilities and debt having accumulated from living beyond ones means.

With no savings from the earlier years to fall back on, you are bound to get into trouble. However, if the saving and a frugal lifestyle was adopted in the first stage then this stage calls for heavy investment in shares, fixed income assets such as bonds, properties and pension savings and analysis of saving and investment vehicles. Inclusion of property investment is critical because it is important to own a home prior to retirement and have property as an income-generating vehicle through rentals.

With roughly 15 to 20 years to retirement, we must assess and adjust the pension savings. For example, if at the age of40 you are earning Sh250,000 to Sh300,000 and you are looking at 5 per cent annual increase in earning which translates to an income of about Sh500,000 at the age of retirement in 15 years, when you retire you will need to get 67 per cent of 500,000 as your monthly pension. This 67 per cent of your earning before retirement translates to the replacement ratio. Working backwards on this will help assess if any adjustments on your current contribution need to be done to increase your pension saving as per your lifestyle.

This is also the age when you start figuring out what you will be doing when you retire. It is an age of discovery, having matured and learnt different skills, you should find a new stream of income through your skillset. It is important to think through this plan so that when you get your retirement, the purpose is clear.

The Consolidation Stage

As retirement closes in, the sunset years call for consolidation and taking stock of the current assets and investments. Find out if the assets are in line with one’s retirement plans and figure out how they can add value or how you can exit and draw your focus elsewhere. The focus should be on secure investments as the risk appetite at this age is low.

It is important to consolidate pension funds from previous employers if you did not at the earlier stages, figure out if your money is safe and how much do you have or can access at a given time. For example, defined contribution pension scheme allows access to only a third of your money as cash and the rest as a monthly pension while a defined contribution provident fund allows access to 100 per cent of the pension as cash.

Planning for retirement also entails figuring out where you will live and getting accustomed to the environment. Preparing for medical care is also very essential. Look at the things that may worry you during retirement, for example, if you will be paying school fees after you have retired.

The Retirement Stage

During your first year of retirement, gradually ease into retirement because the sudden change can be detrimental for your health. It is important to have an engagement that keeps you occupied for about 5-6 hours a day like teaching, training or consultancy. These hours should reduce as the years go by to warm up to the idea of retirement.

Fortunately, the Retirement Benefits Authority (RBA) offers 12 months to retirees to make decisions concerning their retirement. During this period, it is important to completely engage your consultant or pension administrator to help you understand the options you have for retirement. It is also critical to engage your pension provider to be able to know what your options are and make informed decisions in line with your needs and circumstances.

Dr Pesa is Fred Waswa, the Group CEO of Octagon Africa.