How to ensure you are cash rich after retirement

Pension vs needs

When you retire, your pension will not be enough to take care of all your needs. According to Gatumia, on average, you might have been saving 7 to 15 per cent of your income for retirement if you are employed. This figure will not translate into 100 per cent of your needs. After retirement, your pension fund will cater for about 30 per cent of your needs at most. For example, from a pre-retirement salary of Sh100,000, you may end up getting a post-retirement income of Sh30,000. If you have accumulated assets, the 70 per cent deficit will leave you exposed and at risk of selling your assets off to meet your needs. “Once you sell off your asset, it will be gone and so will the money you will be paid.” To measure your retirement cash needs, you should start by looking at how liquid you are today. If you are planning to retire within the next 20 years, you must then create a plan that will give you an income that is as close to what you are earning today. For example, if you are earning Sh100,000 today at age 55, you will need at least Sh60,000 coming into your account every end month. This also means that you must know your targeted retirement balance and whether what you are saving or investing today will be sufficient to meet this balance. You will need to invest your retirement benefits without putting all your eggs in one basket. You need to invest in avenues that can generate passive income. 

The lump sum

When you retire, your pension may pay you in lump sum or annuity. The lump sum can be a great source of monthly income. However, to be sustainable, you will do well not to deposit it in a bank account where you will be making withdrawals whenever the need arises. Assuming you get a retirement lump sum pay of Sh3 million. How you budget for passive income out of this amount will determine your financial liquidity. For example, instead of depositing the amount in a bank account where it will earn interest at below the inflation rate, you can choose to put it in passive investments where they’ll earn above the inflation rate. For instance, out of the Sh3 million, if you choose to put Sh1.5 million into a government bond earning an interest of about 12.5 per cent per annum, you will earn about Sh187,500 in interest per year or Sh93,750 every six months. This will be equivalent to Sh15,625 per month. If you choose to put the remaining balance in a money market fund at a rate of 10 per cent interest, you will be earning an additional income of Sh150,000 per year. The beauty of the money market fund is how easily you can access it and its low risk factor. According to Gatumia, the Sacco is also another way of guaranteeing your cash flow through dividends. “Most people look at Saccos as a place to borrow cash. But they are a good way of earning dividends too,” he says. For example, if you put in Sh10 million in a Sacco that gives 10 per cent in dividends, you will be getting Sh1 million every year. Gatumia says that most people look forward to setting up rentals after retirement. But this may not always be adequate. “Consider the occupancy risk factor, and the cost of building the actual rentals. Rentals will give you about five per cent in returns. This means you must diversify,” he says.

Insurance policies

Most of us are now delaying parenthood, and by the time we retire, we will still have children in school. This can be financially draining. To avoid this, get an educational policy when your child is still young. Search and compare various regulated educational policies such as UAP Old Mutual, Sanlam, Britam, and ICEA’s and how adequately they will cater for your child (ren)’s education in the event of your retirement. At the same time, if you are in the informal sector, a freelancer, or on contractual agreement, get a personal pension plan that will compound your savings up until your retirement age. Most personal pension plans will require you to deposit a minimum amount to keep your account active. 

Health

Retirement heralds the dawn of chronic health complications. Oftentimes, these illnesses will cost you an arm and a leg to treat or manage. According to the health research on retirement and health titled ‘How does retirement affect health?’, retirement is closely linked with the onset of chronic life diseases such as cardiovascular diseases and cancer. This means that health insurance will come in handy. Get enrolled on the NHIF health insurance cover and back up your NHIF policy with a private health policy. 

Debt

Debt can drag you down after retirement, especially if you are looking to take on new debt to fund post retirement projects such as real estate. Avoid debt. Strive to be out of debt by the age of 55 so that none of your pension or post retirement incomes will go into servicing debt.

Business

You may be very tempted to start a business after retirement. This is a risky move. New businesses are hard to break even, more so for retirees. 48 per cent of new businesses opened by retirees are unprofitable while 21 per cent of those started with a lump sum investment collapse. Instead, transfer your professional skills into a consultancy that will give you extra income without using your retirement benefits. Godwin Simba, the Group Executive Director at Octagon Africa, says that this will be easier than opening an actual business. For example, if you work in a financial institution’s credit department, start thinking of how you can gain skills that you can repackage into a consultancy helping SMEs get access to credit after retirement. If you are an investment advisor, start planning how you could be a personal finance or investment consultant. If you’d really want to start a business, start it way before you retire and with funds other than your retirement benefits. Also, avoid business ideas that don't align with your skills.

[email protected]

For feedback write to the editor on [email protected]