I have a lump sum of Sh6 million that I would like to invest.
I am 49 and will turn 50 in April next year. I have a lump sum of Sh6 million that I would like to invest. I understand the importance of diversification and would therefore like to spread the money across different investments, with each generating monthly income.
I am interested in government bonds, but I do not want to wait six months to receive interest payments. I would also like to earn decent returns.
I have worked hard to save this money and even sold an asset to build up the amount. I now feel it is time to invest and start earning from it as I prepare for retirement in the next five years.
I am still employed and earn about Sh49,000 net a month. I have grown-up twins, and my husband is also employed. My main expenses include personal care, giving my children pocket money and supporting my sister's child.
Where should I invest this money, how should I divide it, and how can I structure the investments to generate monthly income? Alice
Inziani Khasiani, a financial consultant and executive director at Klientele Kenya:
With five years remaining before your planned retirement and a net monthly salary of Sh49,000, your primary goal appears to be building a diversified portfolio that generates regular income. This would help support your family while providing financial security in retirement.
You prefer government bonds, but their standard semi-annual interest payments do not match your desire for monthly income. You also want better returns than conventional low-yield bank products, although you have not specified a target return.
Your underlying concern appears to be ensuring that your Sh6 million starts generating income when you retire. Monthly payouts could provide a predictable cash flow while helping you preserve your principal.
However, your current pension position is not clear, making it difficult to determine how much income this investment must generate to supplement your retirement income.
For perspective, generating Sh50,000 a month from a Sh6 million investment requires an annual net return of approximately 10 per cent. Achieving this consistently is challenging without taking on risks that may conflict with your desire to preserve your capital.
You are seeking the safety associated with savings products alongside the returns of higher-yielding investments. Unfortunately, no single financial product guarantees both complete capital protection and high returns. Higher-yielding investments carry greater risks, while capital-preservation instruments generally sacrifice some returns in exchange for stability and liquidity.
A sound strategy would therefore spread your money across different instruments, with each allocation serving a specific purpose.
I recommend dividing your Sh6 million into three investment categories:
1. Core income allocation: Up to 70 per cent
Invest this portion in government securities, fixed-income instruments and low-risk funds that offer monthly distributions. You can stagger investments and interest payment dates to create a more regular income stream while maintaining exposure to relatively low-credit-risk instruments such as Kenyan government securities.
2. Growth allocation: Up to 20 per cent
Invest this portion in a diversified balanced fund or unit trust. Fixed-income investments can lose purchasing power over time because of inflation. A growth-oriented allocation can help protect the long-term value of your portfolio.
3. Liquidity reserve: Up to 10 per cent
Keep this portion in a regulated money market fund that allows easy access to your money without withdrawal penalties, subject to the fund's terms. This reserve will cover emergencies and reduce the likelihood of having to sell longer-term investments at an unfavourable time.
To generate more consistent monthly income from your 70 per cent core allocation, consider a rolling bond ladder. Kenyan Treasury bonds generally pay interest twice a year. You can manage the timing by purchasing different bonds with staggered interest payment dates. A six-month investment schedule, for instance, can help spread the payment dates across the year.
There are three possible investment approaches to consider:
Option A: Start receiving income immediately
This approach follows the three-bucket structure outlined above. It is suitable if you need regular payouts now or prefer the discipline of receiving and managing a predictable income stream.
Option B: Reinvest and grow your capital
Since you are still employed and earning a salary, you could reinvest all investment income for the next five years rather than draw it immediately.
At an assumed annual net return of 7 per cent, Sh6 million could grow to approximately Sh8.4 million over five years, assuming annual compounding and no withdrawals. This could translate into a significantly higher retirement income.
The trade-off is that you would not receive monthly payouts during this period, but your investment would have more time to grow.
Option C: Combine immediate income with long-term growth
You could split the money into two portions: invest Sh3 million in an income-generating portfolio to provide regular payouts, while placing the remaining Sh3 million in investments that reinvest returns and compound over the next five years.
This approach gives you some income now while allowing the other half of your capital to grow ahead of retirement.
You could also consider allocating part of your money to an Individual Pension Plan, which may offer tax relief within the applicable statutory limits. However, access to the funds depends on the scheme's rules, so confirm the withdrawal conditions before committing your money.
Before making your final investment decisions, consider three important risks:
Liquidity and market risk: Treasury bonds are generally considered low-risk investments when held to maturity, as the government is responsible for paying the principal and interest. However, selling before maturity on the secondary market exposes you to price fluctuations. Bond prices generally move inversely to interest rates, meaning you could make a loss if you sell at an unfavourable time.
Taxation: Investment income is subject to applicable statutory taxes. Confirm the prevailing withholding tax rates and other applicable charges when calculating your expected net returns.
Inflation risk: Over a long retirement, inflation can gradually erode the purchasing power of fixed interest payments. This is why a diversified portfolio should include an allocation aimed at long-term growth.
Building and preserving wealth is not a one-off exercise but a continuous process. As your circumstances and market conditions change, review your portfolio regularly and adjust your investment strategy to keep it aligned with your financial goals.
If you have any money problems, send us an email at [email protected].
