By Albanus Muthoka
Our parents taught us to work hard in school, get good grades and secure a well-paying job at a reputable company. This would guarantee a salary every month and more importantly, a good defined benefit retirement package.
While this would sound lucrative, the opportunities for formal employment are very limited today. Furthermore, the younger generations have learnt that, by learning a skill instead of obtaining a certificate, they can make a sufficient living freelancing while enjoying flexibility and freedom.
Besides, the dynamics of work are changing – and they have been doing so since the pandemic almost 5 years ago. More people worldwide are embracing the freedom of self-employment, freelancing, and small business ownership. While these career paths offer flexibility and autonomy, they come with unique challenges, particularly when planning for retirement. Unlike traditional employees who often have access to employer-sponsored pension schemes, self-employed individuals must take a more proactive approach to secure their financial future.
Several retirement planning options are available for the self-employed folks, although specific plans vary. One option is to have a personal pension plan with an individual retirement account, which allows for personal contributions and often offers tax advantages. These accounts can be particularly useful for those just starting their retirement savings journey. By placing a standing order with their bank, the self-employed individuals can make regular contributions towards their retirement.
But what about those living on daily wages? Building a retirement plan might seem daunting, but it’s far from impossible. The key is to start small and remain consistent. Begin by setting aside even a tiny portion of your daily earnings. Over time, these small amounts can grow significantly. Luckily, some pension plans allow contributions from as low as Ksh.100. This can be an effortless way to start building.
It is important to treat saving for retirement as a non-negotiable expense, just like housing or food. Make it a part of your daily budget. As your income grows, aim to increase your retirement contributions gradually. A good target is to save at least 10-15% of your income for retirement. Additionally, continuously upgrading your skills can lead to higher-paying opportunities, allowing you to save more for your golden years.
Saving for retirement with an unpredictable income presents its own set of challenges, but there are practical approaches to overcome them. Before focusing on retirement savings, build an emergency fund to cover 3-6 months of expenses. This provides a financial cushion during lean periods. Another coping mechanism is to have a percentage-based approach to contributions instead of saving fixed amounts. Save a percentage of each paycheck, automatically adjusting your savings based on income fluctuations.
During times of higher earnings, increase your retirement contributions to compensate for lower-income periods. Keep your business and personal accounts separate to better manage your finances and consistently allocate funds for retirement.
If it benefits you, work with a financial advisor to estimate how much money you will need in retirement and how much you should contribute towards this goal and help you review this regularly. Financial advisor present or not, regular financial reviews are crucial. Conduct quarterly or bi-annual assessments of your finances to stay on track and make necessary adjustments to your retirement savings strategy. If possible, develop a steady side gig specifically to fund your retirement accounts to avoid falling victim of pension inadequacy upon retirement.
Retirement planning as a self-employed individual requires discipline, creativity, and adaptability. By implementing these strategies and consistently prioritizing your future financial security, you can build a comfortable retirement, even without the structure of traditional employment. The key is to start today, stay committed.
With careful planning and persistent effort, you can ensure that your golden years are truly golden, filled with financial security and peace of mind.
Albanus Muthoka is the Assistant General Manager, Enwealth Financial Services Limited.
Read: How to manage retirement savings with interest rates remaining elevated
