Planning for retirement is one of the most complex topics to decipher in personal finance. To young people who have just joined the workforce, retirement seems too far to even think about. On the other hand, those leaving the workforce wake up in retirement with little or no savings in their retirement accounts.
Planning for retirement is hard because it requires you to answer difficult questions like, how long do you think you will live? What do you think the inflation rate is going to be like in the future? What lifestyle do you want to lead in your retirement?
The noise around retirement planning has obscured the fundamentals. It gets even more complicated when you find out that satisfaction in retirement has less to do with financial success.
In this article
When Should You Retire?
Retirement means different things to different people. To some, it’s when they reach the maximum working age in their country which is 65 for most countries. To others, it’s when they can accumulate enough assets such that the returns from their investments can meet all their expenses without having to sell their assets.
While many people fall in the first category, you do not have to wait until you are 65 for you to retire. You can retire at any age you want provided you have enough cash-producing assets to support you in your retirement.
How Much Money Do You Need To Retire?
To determine this, you need two things. You need to approximate your average annual expenses in retirement. Secondly, you need to approximate the average return rate your investments can make.
The 4% Rule
To achieve financial independence, some use the 4% rule where you only achieve financial independence once your annual expenses equal a 4% return rate on your investments. To put that into perspective, if you spend an average of 10M every year, you would need a portfolio of 250M invested to retire.
The Crossover Point
Here, you reach financial independence when your monthly income from your investments exceeds your monthly expenses. This point is called the Crossover point. To calculate this;
Crossover point = Annual spending / Expected return rate on your investments.
To put this into perspective, if your annual spending is 10M and you expect a return rate of at least 4%, then you need around 250M to retire. However, these figures would change much depending on the amount you want to spend every year and your average return rate on your investments.
Planning For Retirement
Determine When You Want To Retire
Decide when you want to stop working formally and retire. By retirement, you do not have to do nothing constructive with your life. By retirement I mean, when you want to have accumulated the wealth to support the life you want. This is when you want to focus on working on things you want and you have complete control over your time.
When you know when you want to retire, you will know how many years you have until retirement. If you are like most people, who retire at 65, then you just have to subtract your age from this to know how many years you have until retirement and know how much you have to save and invest every year to meet these goals. This will help you prepare and come up with your retirement goals.
Estimate your Expenses
When planning for retirement, you want to make sure you can afford the lifestyle you want. Here, you have to try and approximate your average annual expenses.
Here, you will realize the importance of investing your money as, if not your money will lose its purchasing power through inflation and you may end up not affording your retirement lifestyle.
Retirement Investment Options
1. Government Sponsored Plans
This is where social security comes in. In Kenya, both employers and employees must contribute to the National Social Security Fund (NSSF)
2. Employer Sponsored Plans
These are retirement plans that companies organize for their employees to help them prepare for their retirement. They are not compulsory but they are an advantage to employees whose employer helps them plan for their retirement.
3. Individual Pension Plans
These are retirement plans that help individuals plan save and invest for their retirement. In Kenya, they are offered by financial institutions, most insurance companies. They are used by individuals to supplement their government or employer-sponsored plans.
4. Build and Manage your Personal retirement Investment Portfolio
This is where you actively manage your investments. You do not save or invest with any mutual fund for your retirement. You build the portfolio that will help you accumulate the wealth you need before you retire. The benefit of this is that you have more control on where your money is invested. You also have a high chance of getting higher returns as you can work on reducing investment costs since you are managing your investments.
What Assets Should You Invest in?
Early on in your career, if you are in your 20s or 30s, you can afford to take high risks in your portfolio. This is because you still have a lot of years that you can work, earn income and build your wealth. You should focus more on growing your income. You can afford to be less diversified so that you can be able to build wealth with your concentrated portfolio and then diversify as you get older and as your wealth increases.
On the other end, older people who are approaching retirement do not have much income-earning time left. They have to ensure their portfolios are well diversified so that they can be able to preserve their wealth in their retirement. That’s why most of their portfolio is in low-risk assets such as Bills and bonds.
Retirement Planning for Young People
The idea of retirement planning for young people in their 20s who have just entered the workforce is too funny to be taken seriously. If you are not doing well financially when you are young, you have a lot of options. You can go back to school, you can learn a new skill, you can look for a well-paying job, or you can find better employment opportunities. However, when you hit the retirement age, you have very limited options. This is why it’s very important to plan and save for your retirement.
Start Early
Time is the biggest force in investing. As an investor, you have to make sure you are taking full advantage of compounding as a wealth creation tool. Starting early is planning for retirement on easy mode. You still have a lot of time before you hit your retirement age. Use this time to save as much as you can early in your career so that you can easily and quickly hit your retirement financial goals.
Have A Retirement Plan
Using retirement calculators, determine how much you need to save and invest each year so that you can reach your target of money invested.
Why Should You Plan For Retirement?
1. Wealth Buys Freedom
Retirement should be more about saving and then investing your money so that you can get the freedom to live the way you want, work on things you love, with the people you like. The goal is to have complete control over your life. Naval Ravikant writes,
“The reason you want wealth is because it buys you your freedom.
So, you don’t have to wear a tie like a collar around your neck. So, you don’t have to wake up at 7:00 AM and rush to work, and sit in commute traffic.
So, you don’t have to waste away your entire life grinding all your productive hours away into a soulless job that doesn’t fulfill you.
2. You Won’t Work Forever
You will one day be old and you will reach a time when you hit the retirement age and your employer will send you an official letter allowing you to go home and raise your grandchildren. That means that you will lose your source of income or a huge amount of your source of income but you will still need money to support your lifestyle in your old age. As you consider retirement house or assisted living options, it’s crucial to plan for your financial security for a comfortable and fulfilling retirement, ensuring to check out St. Andrews for tailored solutions and guidance in exploring suitable living arrangements aligned with your needs and preferences.
3. You Do Not Want to Be A Burden to Your Family
The family unit has weakened. Your children may not even support you in your old age. The worst thing you could wish on your retirement is having to worry about money. Additionally, as you approach retirement, you can quickly reflect on the availability of assisted living as a thoughtful option, ensuring financial concerns don’t overshadow your golden years.
4. To Support the Lifestyle You Want
With proper retirement planning, you will be able to save and invest your money which will help you lead your desired lifestyle in retirement. That could be traveling the world, or being able to happily raise your grandchildren and support yourself without depending on anyone, [including options like planning for a retirement community for your yearned retirement preparation.]
5. Enjoy Tax Benefits
Most governments, including the government of Kenya, offer tax benefits to contributions made to retirement accounts.
Retirement is Not All about Money
Just like how money alone cannot bring you all the happiness and satisfaction in life, being financially prepared in your retirement may not be the only thing you should worry about when preparing for retirement.
However, being able to cater for yourself in your retirement means a lot as you will be able to avoid most of the stress and depression that faces people in their old age as a result of financial problems. Nick Maggiulli writes,
“The most important decision you can make in your retirement is how you are going to spend your time, not your money.
Many people end up retired and lose their sense of purpose despite having sufficient financial resources.
While money is important for your retirement, once you have had some base level of financial security, your day-to-day happiness in retirement will be more heavily impacted by your relationships, your hobbies, and your sense of purpose than your financial assets.”
