I am married with two kids who are finishing high school this year. I just turned 53 and am planning to retire within the next two years. I have Sh5.4 million in bank savings that I have built over the years. My spouse and kids live upcountry where we have a farm and a house. I work from Nairobi and travel home every two weeks. As I inch closer to my retirement, I have been thinking of the best ways to build passive income. So I joined a money market fund and conducted a trial. I invested Sh500,000 and earned Sh2,800 after one month. I was very disappointed and don't think it's worth it.
I am now seeking help on alternatives in the market that can give reliable passive income that can sustain me and my family through my upcoming retirement years. I also seek your advice on economic activities that I can venture into once I return upcountry to stay busy and engaged and make money. I don't want to just sit idle waiting for passive income. My net salary is currently Sh145,000. My expenses are wife allowance Sh10,000, Upcountry expenses Sh30,000, Fees Sh19,000 per month, Rent in Nairobi Sh15,000, Fuel Sh10,000, Food Sh15,000, Miscellaneous Sh10,000, School fees for my sister's kids Sh20,000. Please guide me. Jonathan
Alex Kibebe is the founder of Rubiani Wealth Management Ltd and an investment consultant.
From what you have shared, once you relocate upcountry and eliminate Nairobi rent and commuting costs, your retirement expenses could reasonably include Sh25,000 for food, home upkeep and miscellaneous household needs, Sh20,000 to support ongoing education needs as your children transition beyond high school and Sh10,000 as household allowance.
This brings your monthly need to approximately Sh55,000. If you factor in a medical protection budget of around Sh5,000 per month, your realistic retirement budget would be roughly Sh60,000 per month.
Currently, your net salary is Sh145,000 and your expenses total about Sh129,000, leaving a surplus of roughly Sh16,000. If you retire in two years without strengthening your savings position, your funds may not generate sufficient passive income to sustain you comfortably. This makes the next 24 months particularly important.
You need to adjust your lifestyle to increase your monthly savings to at least Sh35,000. This can be achieved by lowering your expenses in line with your priorities. For example, you could gradually reduce support to your sister’s children from Sh20,000 to Sh10,000, trim upcountry expenses from Sh30,000 to Sh20,000 where feasible, and tighten miscellaneous spending from Sh10,000 to about Sh4,000. Making such adjustments can free up about Sh20,000 per month.
At this stage of your life, it is wiser to prioritize capital protection over pursuing higher returns. Suitable options that preserve capital include Money Market Funds, Bond Funds or Treasury Bills. If you consistently invest Sh35,000 per month at an average return of about 10 percent per annum and place your current Sh5.4 million fund in a similar portfolio, your total retirement fund could grow to approximately Sh7.4 million by the time you retire.
It is important to note that MMFs have low risk and hence low returns. Do not focus on the enticing high returns alone. Also understand that essentially, MMFs are not designed for investments. They work best as alternative channels where you can store you money for the short term to avoid the impact of inflation and to earn compounded daily interest as you plan on what to invest for the medium to long term.
At retirement, aim at maintaining a substantial portion of your fund in similar investments that protect your capital while generating steady and long term passive income. For example, you could allocate Sh6 million to a Treasury Bond with a long tenure of over 10 years - currently yielding about 12 percent per year net of tax.
This would generate approximately Sh720,000 annually, translating to about Sh60,000 per month over the life of the bond. This income would adequately cover the retirement budget we projected earlier.
You can then allocate about Sh800,000 in a Money Market Fund as a liquidity buffer to cover emergencies, higher education expenses and other family contingencies - without forcing you to liquidate your bond investment prematurely.
This leaves approximately Sh600,000 from your projected Sh7.4 million retirement fund that you can allocate toward the economic activity to pursue after retirement. Given that you already have a farm, agribusiness would be a practical starting point.
For example, you could allocate part of this amount toward the purchase of livestock, animal feeds and initial working capital. Alternatively, you could begin with poultry or a modest horticulture project depending on your interests, region’s suitability and market access.
Other alternatives you can consider include consultancy or part-time advisory work based on your professional experience. However, it is important to ensure that such ventures are funded only after securing sufficient passive income to cover your core retirement expenses so that you do not rely on the less predictable business income for your financial sustainability in retirement.
If you have any money problems, send us an email at [email protected] and leave your number for contact. The questions will be answered on this column.
