Money Management
November 11, 2024
.jpg)
High inflation levels and increasing living costs mean you'll need to prepare adequately for retirement to meet your basic needs. But you might mistakenly think retirement is far away, maybe three decades away. So, what do you do? You shelve planning for your golden years in favour of living a more stable life at the moment.
It's not a lie that you have a lot on your table now. From providing for your family, supporting your aging parents, and sending "something small" every time one of your neighbours has a harambee to send their kid to university. On top of all that, you might have to invest in your kids' education and save for homeownership.
So how do you manage all this while ensuring your future is secured?
Early retirement planning is the answer to all your worries. You still have time if you hadn't started immediately when you got your first pay cheque. It's the only way you can support yourself financially, generate income, and live the peaceful/relaxed life you envision now when you retire. Without it, you will likely struggle to pay your bills, be self-reliant, or give yourself the lifestyle you deserve.
Here are six reasons why a lack of early retirement planning can expose you to financial instability, cause you to struggle to provide for yourself, and live a comfortable life reaping the fruits of your years of hard work.
Read Also: Stability: How to Budget and Save A Lot Early In Your Career
The person who is invested the longest in any investment scheme is likely to get the maximum returns. When you start investing early, you get a head start because of four important advantages:
While you allocate your portfolio and invest in the long-term goals to make you immune to instability, don't ignore the risks involved. There's no guarantee that your investment will appreciate or keep earning you dividends forever. Ensure you diversify across different investment classes to lower your exposure to maximum loss.
Read Also: 7 Common Investing Mistakes To Avoid
When you think of retirement, you might think of a new life of adventure or maybe a peaceful one on your farm away from the noise of urban areas. Whatever your retirement dreams are, to actualise them, you need to be financially stable. And that requires early planning.
The truth is, you won't have the luxury to retire until you are convinced your finances are in order and you can support yourself without working. And this is a phenomenon facing many senior citizens in Kenya. Lack of financial security has kept them working well past their retirement age. The Kenya National Bureau of Statistics (KNBS) report shows that over 80% of Kenyans above 60 years were still in active employment.
Early planning, however, can allow you to retire on your terms, including taking early retirement. If you start investing early, your nest egg has the potential to grow, and you could achieve your retirement corpus goals before your retirement age.
Read Also: How Much Money Does a Kenyan Need to Retire at 45?
By starting early retirement planning, you can save for the future and get attractive tax relief now. The KRA allows for a relief of up to Ksh20,000 per month (or Ksh240,000 per annum) when you contribute your retirement savings to a registered RBS. Your employer will deduct your preferred contributions from your gross income before calculating tax.
Let's say, for example, you are a professional and formally employed. You have a gross salary of Ksh80,000, and since you take early retirement planning seriously, you contribute 20% of your pre-tax salary to a registered Retirement Benefits Authority (RBA). This means your taxable income will be your gross salary minus contribution benefits, i.e., Ksh64,000.
And that is not all. After retirement, the income or allowance you receive from your RBA also has tax incentives. The first Ksh600,000 lump sum you withdraw is tax-free. Additionally, the monthly pension of up to Ksh25,000 (or Ksh300,000 per annum) you receive will be tax-exempt.
Early retirement planning will save you thousands of shillings per month, generate a steady retirement income, and help you stay financially stable.
Also Read: The Risk and Rewards of Investing in Pension Funds
As the quality of life improves and healthcare advances, so does the life expectancy. There is a possibility that you might live for decades after retirement, and during that time, you must support yourself. One of the risks life span increases pose is outliving your savings and assets. And when this happens, you will be driven to instability.
You'll be forced to change your lifestyle, have to get back to work after retirement, or be forced to depend on others for your basic needs. And when you can no longer provide for yourself in retirement, you might have to sell valuable possessions like your house or land, which can put you in a more unstable position.
Early retirement planning allows you to accumulate more assets, develop different avenues of generating income after you leave the workforce, and prevents you from outliving your assets. This ensures you'll not only be able to be self-reliant but also leave a sizable estate for your heirs after your demise. You will set them up for life and kick-start the process of building generational wealth.
Read Also: How to Plan for Retirement While in Your 30s
Look around; if you are not paying black tax and supporting your retired parents, chances are you know people who do. The most significant effect of a lack of early retirement planning is you won't be able to depend on yourself after retirement.
Your next best option will be relying on the government's pesa kwa wazee grant, which is not sustainable/enough or having to call your children every weekend.
Making your children your retirement plan isn't a bet you want to place, and here's why:
No Guarantee: As a parent, you'd want to shelve retirement planning and use the money to give your children the best education to get the best careers. But there's no guarantee they'll be the high earners you envision. And even if they do, they might have their needs and barely have any disposable income to support you.
No Privacy: Many parts of your financial life will become exposed to your children when you rely on them. Every time you ask for money, your children will likely ask what it’s for, and you have to give explanations every time. This won't be an enjoyable ride.
You’ll be holding them back: Your children will be grown-ups with their personal goals and responsibility. You will be holding them back when you insert yourself in the middle of their finances. They’ll be forced to prioritise your need, which might affect their early retirement plans—exposing them to the same instability you’re facing.
Read Also: How ‘Black Tax’ Impacts You Financially & How to Manage It Better
One of the best ways to guarantee the financial instability of your dependents is by buying life insurance. The annuity that your insurer will pay them after your demise can be used to cover funeral expenses, educate your children, pay your debt, pay estate taxes, and much more.
Life insurance can be a vital instrument when planning for retirement. Early planning allows you to get this essential cover at affordable premiums and maximize the lump sum to be paid. A person who buys a cover in their early thirties will pay less than one who buys in their 50s.
If you take a term life insurance that matures after a specified period ( usually 3 to 20 years), you could enjoy the benefits while still alive. You could cash out the money and use it to fund your retirement life after your other investment fails and you are exposed to financial instability. This will allow you to land on your feet faster.
Read Also: What is Financial Instability in Your 30s? (What Causes it?
As you juggle all these obligations and chase other financial goals, it's easy to forget or downplay retirement planning. Maybe you are enrolled in the state pension scheme and think it's enough. But will your contribution to NSSF be enough to sustain you once you leave the workforce, or will it expose you to financial instability?
Early retirement is the only way you can have a piece of mind that you won’t have to deal with instability in your golden years. You will be able to provide for yourself sufficiently, not worry about burdening your kids and maybe be that cool grandparent who buys their grandkids their first bike. Finally, you can have the freedom to spend your retirement doing whatever you want.
.png){kind=small}
Join 1.5M Kenyans using Money254 to find better loans, savings accounts, and money tips today.
Money 254 is a new platform focused on helping you make more out of the money you have. We've created a simple, fast and secure way to find and compare financial products that best match your needs. All of the information shown is from products available at established financial institutions that our team of experts has tirelessly collected.
