HOW TO BEST PREPARE FOR RETIREMENT



RETIREMENT! ARE YOU PREPARED?

We do not need to retire to know what retirement really means. We have seen how our parents, former colleagues, relatives and friends live in their retirement years. Those who planned and saved for retirement will continue to enjoy the standard of living and lifestyle they had before. Those who did not plan, will more likely than not witness a deterioration in their living standard due to insufficient retirement income.

Everyone knows that it’s important to plan for their retirement. Yet no matter how crucial retirement planning is, most people do not seem to have the urgency to prepare a proper retirement plan that can provide them with a financially secure retirement.

There seems to be a reluctance to plan for the future, as retirement often seems to be too far away. Unfortunately, the future will come sooner than we think.
Retirement needs should be addressed now. This can be done by joining a registered retirement plan. Doing so enables us to influence our future.

There are some common excuses people give for not planning for their retirement based on Ten Myths:-

MYTH 1. The Government will take care of me after retirement
This is a myth that leads many people to the ‘poverty trap’ in old age. Evidence is rife in our country about the many old people who are living in poverty. The World over including developed countries, governments are unable to care for their senior citizens adequately e.g. in America the government increased the retirement age to 67 years as the government was unable to cater for retirees. The government tried to resolve this by extending the retirement age so that people are forced to work longer and take care of themselves. Here in Kenya, The Government launched the ‘Pesa kwa Wazee’ program through the Ministry of Devolution. However, the percentage of old people benefiting from this program is quite small compared to the number of deserving cases.
This is a clear indication that we need to take charge of planning for our future to avoid falling into the ‘old age poverty’ trap.
“In the Sub-Saharan Africa, 85% of the aged population lives in abject poverty because less than 5% of the labour force is covered under the formal pensions system (Palacios & Pallares-Millare, 2000).”

MYTH 2. My Social Security benefits will be adequate in my Retirement
Retirement benefits paid out to retirees under the current NSSF Act are very meagre with majority of people receiving less than Kshs. 200,000 after many years of service. This money is hardly enough to sustain the retiree beyond two years of their retirement. How would the retiree then survive for the next 20 or 30 years? This challenge is compounded by the fact that with the medical advances resulting in improved healthcare many people are now living much longer after retirement.

Planning for your retirement is your responsibility and not the Government’s responsibility.

MYTH 3. My Children will take care of me
Many people assume that their children will take care of them during their retirement life. The cost of living is going up every day. Young people are finding it difficult enough to provide for themselves and their young families. Even the most doting children may not be able to earn enough to afford giving their parents a decent retirement life. More so with the world becoming a global village, the children could migrate to other countries and be unable to support their parents due to the high cost of living.

It is obvious that in retirement, we cannot expect to be the priorities in our children’s lives.
“Pensions increase older people’s access to services such as health care and reduce their dependency on the younger generation (Help Age International, 2006). “

MYTH 4. My Expenses during Retirement will be minimal
The World Bank’s rule of the thumb is that one should aim to have a monthly pension of at least two thirds (2/3rds) of their last monthly salary in order to continue enjoying their current standard of living.

Example: A person earing Kshs. 50,000/- per month would need about Kshs. 33,000/- as his/her monthly retirement income to enjoy the same quality of life.
The assumption behind this is that there will be a 50% reduction in work related expenses. However other expenses like medical costs and cost of hired helpers will increase by 20%.
“Pensions can therefore play an important role in breaking intergenerational poverty cycles and thus increase the life expectancy of the elderly generation (Help Age International 2006; Keizi, 2007).”

MYTH 5. It is too early for me to start saving for retirement
I still have time… retirement is a long way off. This is a myth that many people fall for and then they are caught off guard.
Compound interest has been described as one of the wonders of the world. Starting to save early enables you to reap the magic of compound interest. Liz Weston in her book ‘Deal with your Debt’ has done calculations that show the magic of compound interest. In her example, starting retirement savings at age 22 for only 10 years versus starting at 32 for 30 years, gave the former two thirds more money in retirement than the latter.

MYTH 6. It is too late to start saving now
The best time to start saving for retirement is when you’re young, but if you didn’t, it’s still not too late. Many people in their 20s and 30s didn’t save much because they weren’t earning much income and had a lot of expenses. If you haven’t saved much by the time you’re 40, then you might think it’s too late to start saving for retirement. Most people should be entering their prime earning years in their 40s, and they’ll have a lot more resources to draw on. Even if you haven’t saved for retirement when you’re young, you can still catch up and save more when your salary is higher. It’s not too late to save for retirement.

MYTH 7. I can keep working forever.
Some people think they can keep working until they die, but that’s not realistic. Many others also think of setting up and running businesses during their retirement. Health problems is the number one reason people retire early, and we are all more vulnerable as we age. When you’re young and healthy, you might think you can work forever, but spend more time with older people with health issues and this myth will be dispelled pretty quickly

MYTH 8. I don’t really get any tax benefits because I still get taxed when withdrawing my retirement fund.
A retirement Benefit scheme registered with KRA enjoys immense tax benefits for both the employee and the employer. Pension has the edge over many other kinds of savings.
It is one investment you can keep safe from the taxman.

Pension funds enjoy three fold tax benefits as follows:-

  • Tax-free contributions – Contributions by both the employees and employer to registered schemes are tax deductible subject to the following limits:
    – In respect of the employee’s contributions, it is the lower of 30% of Pensionable income or the first Kshs. 240,000/= per annum (Kshs. 20,000/- per month).
    – In respect of the employer’s contribution, it is 30% of the aggregate of pensionable income of the members or Kshs. 240,000/= per annum, times the number of members whichever is less reduced by the employees’ deductible contributions.
  • Tax free investment growth – The investment income earned by the registered funds is also tax exempt in its entirety.
  • Tax -free benefits
    – Up to Kshs. 600,000/= lump sum, is tax exempt or Kshs. 60,000/= for every year of pensionable service.
    – Up to Kshs. 300,000/= pension per annum or Kshs. 25,000 per month is also tax exempt.

In conclusion, if you are poor and financially insecure while you are still young, strong and working, you can do something about it. You can get a better job, find better employment opportunities, go back to school or even start a business.

But unfortunately this is not possible when you retire. Once you cross the retirement age, you have very few options.

To start planning for your retirement today please contact the following companies for more information:-

1. Britam – info@britam.co.ke

2. CIC Life Insurance – cic@cic.co.ke

3. ICEA LION Life Assurance – info@icealion.com

4. Jubilee Insurance – jic@jubileekenya.com

5. Kenindia Assurance – kenindia@kenindia.com

6. Liberty Life Assurance – info@libertylife.co.ke

7. Madison Insurance – madison@madison.co.ke

8. Pan Africa Life – insurance@pan-africa.com

9. UAP Life Assurance – uapinsurance@uap-group.com
Alternatively please contact us at The Association of Kenya Insurers (AKI)
and we will be glad give you the necessary information.

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