Retirement planning is crucial for everyone, but especially so in Kenya where there is no universal social security system. With proper planning, you can retire comfortably even on a modest income. This comprehensive guide will walk you through everything you need to know to plan for a secure retirement in Kenya.
The aim of retirement planning is to accumulate enough wealth to replace your income once you stop working. With people living longer lives, retirement can last 30 years or more. That’s a long time to sustain yourself without a salary!
Retirement planning guarantees you don’t outlive your savings and continue to meet your living expenses when you are no longer earning an income. It involves setting aside funds, choosing retirement savings accounts, and investing so your money can grow.
The three main steps in retirement planning are:
- Knowing your retirement needs
- Saving and investing for retirement
- Managing assets after retirement
This guide will cover all three phases and provide tips tailored specifically for retirement planning in Kenya.
Retirement Planning Considerations in Kenya
Retirement planning in Kenya faces unique challenges compared to other parts of the world. Some key factors to consider include:
No Universal Social Security – There is no generalized social security system in Kenya that you can depend on. The National Social Security Fund (NSSF) only covers formal sector employees. The informal sector employs over 80% of Kenyan workers. This means the majority of citizens must self-fund their retirement.
Low Pension Coverage – As of 2019, only 20% of Kenyans above the age of 55 received a pension. Pension schemes in Kenya have low coverage overall. You cannot rely solely on employer pension contributions.
Long Life Expectancy – Kenyans have an average life expectancy of 67 years. Your retirement savings must last 25-30 years after you stop working.
High Inflation – High inflation averaging 6.5% over the past decade eats away purchasing power. Your retirement savings must account for this.
Supporting Dependents – Most Kenyans support children, spouses and elderly parents in retirement. Your savings must cater to entire households.
Low Returns on Savings – Interest rates on savings average 2-3% in Kenya, barely keeping up with inflation. This makes accumulating retirement savings harder.
These factors make a tailored retirement plan essential for anyone planning to retire in Kenya. The rest of this guide will show you how to navigate these challenges.
Calculating Your Retirement Needs
The foundation of any retirement plan is knowing how much money you will need in retirement. This depends on your desired standard of living.
Follow these steps to calculate your retirement goal:
Step 1: Estimate your desired annual income in retirement
Determine the annual income you would like to sustain your desired standard of living. Factor in expenses like:
- Hobbies and entertainment
Step 2: Adjust for inflation
Apply an inflation rate like 5-6% to represent how expenses may rise over a 30 year retirement. If you need Ksh 100,000 per month today, you may need Ksh 280,000 per month in 30 years with 6% annual inflation.
Step 3: Factor in dependents
Account for any dependents you plan to support in retirement. Include their living costs in your totals.
Step 4: Determine the size of your retirement portfolio
To calculate the total savings you need by retirement:
- Multiply your desired annual income by 25. This is known as the 25x rule.
For example, if you estimate needing Ksh 5,000,000 annually in retirement multiplied by 25 equals Ksh 125,000,000 total savings needed.
The 25x rule assumes 4% annual withdrawals from your retirement portfolio. Ksh 125,000,000 with 4% withdrawals gives you Ksh 5,000,000 yearly income.
The exact multiplier can range from 20-30x. A more conservative 30x means your portfolio must be 30 times your needed income.
That covers estimating your retirement savings goal. Next, we will look at how to accumulate this over your working career.
Saving and Investing for Retirement
With your retirement savings target in mind, your focus shifts to consistently saving and investing over your working years.
Follow these best practices to grow your retirement fund:
Start Saving Early
Your retirement fund grows through compounding over time. Starting early is critical to capitalizing on compound interest.
Saving from the beginning of your career gives your money more time to compound. Waiting even 5-10 years can drastically reduce your total retirement savings.
Start socking away retirement savings as soon as you start earning. Time is your most valuable asset.
Contribute at Least 20% of Income
Experts recommend saving at least 20% of your income towards retirement. This includes any employer contributions.
Saving 20% annually allows you to accumulate sufficient retirement savings over your working career. The earlier you can get to 20% contributions the better.
For example, saving 20% annually over 40 years results in 6x your annual income saved. Saving that same amount over 30 years yields around 3-4x your income.
Take Advantage of Tax-Advantaged Accounts
Kenya offers several tax-advantaged accounts to encourage long-term savings. These include:
Voluntary Pension Schemes – Employer retirement accounts allowing tax-deductible contributions up to Ksh 20,000 monthly.
Individual Retirement Benefits Schemes – Individual accounts with tax-free contributions up to Ksh 20,000 monthly.
Tax-Free Savings Accounts – Tax-exempt investment accounts with a limit of Ksh 500,000 annually.
Utilize these accounts first to benefit from tax savings that boost your returns.
Invest for Growth
Simply saving will not grow your money fast enough to meet retirement goals. You need to invest savings for higher returns above inflation.
The most common retirement investments include:
- Equities like stocks and equity funds for market-beating returns.
- Bonds for steady interest income.
- Real estate for rental income.
- Commodities like gold for diversification.
Develop a diversified portfolio across these assets to maximize returns without excessive risk.
Rebalance and Track Performance
Review your retirement investments at least annually. Rebalance your portfolio to keep your desired asset allocation. Stay disciplined about regularly contributing to retirement accounts.
Now that you know how to save and grow retirement wealth, let’s look at managing income in your later years.
Managing Assets in Retirement
Once you enter retirement, your focus shifts from accumulation to preservation and distribution of your retirement assets. Follow these guidelines for managing your assets in retirement:
Determine Your Withdrawal Rate
Your withdrawal rate is the percentage of retirement savings you take out each year as income. This rate must be sustainable over your full retirement.
The widely accepted safe withdrawal rate is 4% annually. This initial rate is adjusted for inflation to maintain purchasing power.
With Ksh 10 million in retirement savings, a 4% withdrawal would give Ksh 400,000 in the first year. This can rise with inflation to say Ksh 450,000 in year two.
The 4% rule aims to provide income for 30 years without running out. You can start more conservatively at 3-3.5% if you desire.
Create Income Streams
Rather than only drawing down savings, look to build steady income streams in retirement. These can include:
- Pensions – Monthly payments from employer and personal pension plans.
- Rental income – From investment properties.
- Dividends – From stocks and equity funds held.
- Royalties – From intellectual property, books or artistic works.
- Business income – From consulting or an existing business.
Multiple income sources provide more stability and sustainability in retirement years.
Review Asset Allocation
Asset allocation is the percentage of stocks, bonds and other assets held. As you age, consider shifting allocation more towards fixed income assets like bonds for stability.
If investing predominantly in equities, you can transition partially into more income-generating assets closer to retirement. This reduces sequence of returns risk.
Revisit your target asset allocation at least every five years as you get older. Adjust holdings to align with targets.
Plan for Long-Term Care
With improving longevity, you may need long-term care in later retirement years. This encompasses medical, housing and personal needs assistance.
Long-term care insurance can cover these costs. Alternatively, you can self-insure by keeping 3-5 years of savings in liquid assets.
Update beneficiaries on retirement accounts, insurance policies and estate plans. Review allocated percentages to each beneficiary.
This ensures your assets are distributed as intended in the event of death.
Conclusion to Retirement planning
Retirement planning has unique challenges and considerations in Kenya. With proper diligence, you can retire comfortably on your own terms in Kenya. Consistently save, prudently invest, and carefully manage your assets.
The key takeaways are:
- Know your retirement income needs early. 25x annual spending is a common goal.
- Start saving immediately, contribute 20% or more of income.
- Use tax-advantaged accounts and invest wisely.
- Follow the 4% rule for safe withdrawals in retirement years.
- Develop multiple income streams beyond drawing down savings.
- Review asset allocation and beneficiaries regularly.
With focus and discipline, a fulfilling retirement in Kenya is certainly achievable. Plan carefully and reap the benefits through your golden years.