To someone in their 20-s, retirement seems distant and surreal. It is a common mindset among the young people that retirement is a preserve of the old, therefore not among the things they have to worry about. It is not uncommon to hear our youth chant the You Only Live Once (YOLO) mantra forgetting that their one life has several stages, retirement and old age being one.
With the advancement in technology, mobile and internet penetration, the modern-day twenty-something has endless opportunities, time, and energy to engage in all sorts of side hustles to make extra cash besides their normal 8-5 job or business. Despite making decent bucks from these income streams, they usually end up spending the money on ‘sherehe’ and glam lifestyle because they scarcely have crucial money commitments besides repaying their HELB loan maybe. In contrast, fewer responsibilities should make retirement saving easier. Creating a decent amount of retirement income becomes hard when one is above 30 with more obligations like family, and mortgage, among other responsibilities.
Kenyans are the worst savers in East Africa with a savings rate of 12 percent which is way below the continent’s 17 percent average, a July 2021 study by EFG Hermes shows. Paradoxically, Uganda and Tanzania are already past the 20 percent mark, their much low per capita income notwithstanding. According to a ‘Retirement Confidence’ Report released by Enwealth Financial Services a few years ago, only one person in seven working Kenyans is fully confident about their financial well-being in retirement. Nevertheless, with the right education, the youth have the power to alter this statistic by starting the journey now.
One of the most compelling reasons to start retirement investing early is compound interest, which is said to be the eighth wonder of the world. The savings grow exponentially such that the interest generated from the savings makes interest too. The longer the period of investment, the more the time for compound interest to work. Say at 25, one sets aside Ksh5,000 monthly in a retirement scheme that earns an average of eight percent. At 60, that individual’s kitty will have Ksh10,412,934 where Ksh8,307,934 is accumulated interest.
If your job has an occupational pension scheme, then failing to save for retirement is simply passing on free money as employers habitually match their employees’ pension contributions. Other unexpected happenings could also affect your finances. It could be a market downturn or job loss. It pays to be prepared. At a younger age, one has more time to recover from drastic market events. Additionally, their retirement kitty is cushioned in case they are laid off.
Another consideration that is often overlooked in retirement is incapacitation. In this case, individuals may be forced to retire early due to illnesses that render them unable to perform at work.
Starting to save early for those who are formally employed will help them pay less tax. If they are paid a basic of Ksh80,000 and the employer deducts a monthly contribution of Ksh8,000 for retirement only the Ksh72,000 will be taxed. The Ksh8,000 contribution will get tax relief.
Early retirement planning will also enable you to retire early by choice and probably chase other dreams outside of your work like traveling the world. It will also ensure your children do not have to support both their children and you or your partner at the same time. It would give your children more room for their own financial stability.
Normally, when the saving goal is too far long, it doesn’t feel urgent. One feels like they still have time. That they can always do it tomorrow or the next month but time flies. Retirement is a very significant point in life and one needs to plan early and well for it to guarantee financial freedom in the golden years. If one starts saving for it early, they will need to work lesser for a financially secure future. To make retirement years the best years of your life, start now and relax later.
This article was written by Fredrick Wabala, Senior Corporate Pension Officer at Enwealth Financial Services Limited.