Why entrepreneurs need to save for retirement

Sundeep Raichura, CEO Alexander Forbes Kenya [Courtesy]

?Sundeep Raichura, chief executive at Zamara Group, has more than 30 years’ experience working in pensions, having started his career in the United Kingdom in 1988.

He returned to Kenya in 1995 and rose from being an actuarial analyst to head Zamara, a position he has held for the last eight years.

As a contributor to various aspects of the pension conversation in Kenya over the last 25 years, Raichura talks about why entrepreneurs should not forget to save for their retirement.

Statistics suggest that more than 40 per cent of Kenyans will be forced to continue “working” after retirement while a similar percentage will be dependent on family support in their retirement. Less than 5 per cent are expected to be financially independent and an even smaller number will be comfortable in their retirement.

These are depressing statistics. Very few people take planning for retirement seriously. Unfortunately, most people need a wake-up call before they take saving towards retirement seriously.

Culturally, we have relied on the traditional forms of old age protection such as the elderly being taken care of by the young, extended families.  With the changing social fabric in our country, rapid urbanisation and a breakdown of the traditional extended family support. These traditional forms of old age protection are being stretched to breaking point. 

As an entrepreneur, retirement planning is the last thing on your mind, as you are constantly thinking about sales and profits. Most Kenyan entrepreneurs tend to plough their profits right back into the business. This is a natural instinct amongst business owners, but failing to set aside funds for investment outside their business or in a retirement savings plan is a big misstep. It is important to consider what would happen to your business when you are no longer able to work because of old age or illness. As you get older, that “endgame” should consume more of your attention.  

There are many benefits of owning your own business, but you also need to consider the risks and succession planning. Many entrepreneurs feel that selling their business will be their retirement plan, but I would not bank on this as a retirement strategy. Selling a business, especially one that is reliant on the owner or is family-owned with many differing viewpoints, can be complex.

And even if you do, you may not get the value you were hoping for or do so within your desired timeframe. Thus, from a risk management view, it is important to diversify your retirement savings plan and have investments outside your core business. Don’t put all your eggs in one basket. Also note pension saving is incentivised through tax breaks. Hence, if you are not saving for retirement, you are paying more in taxes than you should.

Careful planning and diversification of assets is key. One way to generate retirement capital is to get an entrepreneur’s business ready for a sale and have a structured plan for this. The plan should enhance business governance, systems and processes and get early financial advice on exit options, their merits and efficient tax planning. However, regularly setting aside money in an approved retirement plan or an investment portfolio will give you peace of mind and financial security. This diversifies your assets so that if your business performs poorly, it will not impact all your investments. When it comes to investments, time is key. The longer you save and hold your investments, the more you benefit from the power of compound interest.

While entrepreneurs can teach themselves a lot about investments and retirement planning, it pays to consult a financial advisor. Just as it is important to hire good accountants and lawyers for your business, it pays to hire an experienced, qualified and trustworthy professional to help you with your financial planning. One size does not fit all and it is critical for the advisor to take into account your own unique requirements. A financial adviser can save you from making costly mistakes.

Some of the red flags to watch out for in pension funds… Offers that sound too good to be true that promise high guaranteed returns, risk free investment, sensational pitches and fake testimonials should be avoided. Beware of investing with unlicensed providers or falling into a herd instinct of doing it because everyone is doing it. Particularly, be careful of sellers asking you to sign up immediately or you will lose the opportunity. Beware of people asking for your personal details or wiring money to a personal account. Ask the right questions and conduct a background check on any provider. 

For young people, retirement is in the distant future. What we do not realise is that we are aging every day and getting nearer the time when we will no longer be able to work for a living. Many people put off thinking about retirement and cite other more pressing priorities on the already tight disposable income. But consider living 25 years to 30 years after retirement with no income. While you are working, you have the best opportunity to shape your future since your options will be limited once you retire.

I see first-hand the challenges of pension and financial exclusion in Kenya and Africa. Unless something is done to increase the coverage and adequacy of pensions, I see poverty amongst future elderly persons on the continent to be a dominant cause of poverty. But I also see the potential of a well-designed inclusive retirement savings system to secure peoples’ financial wellbeing. Therefore, I am passionate about reaching out and promoting a culture of saving for Kenyans.

While Kenyans have suffered in the past from poor management of retirement funds, the enactment of the Retirement Benefits Act in 1997 and the regulations in 2000 has made our savings the safest in Africa. Kenya has one of the best regulatory frameworks in Africa, with a system of checks and balances. Today, pension savings are secure and well managed. Members of retirement funds can be assured that their savings are well looked after. 

If you are lucky to work with a company that offers a retirement savings plan, you are off to a good start. You just contribute through your paycheck and hopefully, your employer is also adding to your retirement nest by co-contributing with you. You can also boost your own retirement savings by making additional voluntary contributions. But if your employer does not offer a retirement scheme, or you are an entrepreneur, then you should be concerned about your retirement savings and come up with your own retirement saving plan. You must set up a retirement savings plan on your own and be disciplined about making regular savings.

Everyone needs to save for retirement. Open an individual retirement account and ensure you save a sensible amount. Consistency is more important. Discipline is critical. Even if you are stretched financially, put aside whatever you can and set a goal of hitting your target over a period of time. Once you have saved, leave the money alone and let it work for you.