Retirement planning is a critical aspect of financial health yet, many Kenyans still hold misconceptions that encourage old age poverty and forced work in retirement. Let’s debunk some of these common myths about retirement savings and look at ways we can secure a better financial future.
I am too young to start saving for retirement
Most of us believe that retirement is too far off to worry about now. On the contrary, starting early is one of the best financial decisions you can make since you’ll benefit from the power of compound interest, where your investment earnings generate their own earnings over time.
For example, if you save Sh5,000 monthly starting at age 25, assuming a 7 percent annual return, you could have nearly Sh12 million by age 65. Delaying savings until age 35 could cut that amount by more than half.
I can always catch up on saving for retirement later
Some of us believe they can delay retirement savings and catch up later which unfortunately often leads to insufficient savings. The later you start, the higher the amount you will need to save each month to reach the same retirement goal which can be straining. Here is an illustrative example of why you should always start early; For a 20- year-old to save Sh5 million by the age of 60, they will need to save around Sh900 every month, assuming the interest rate is 10 percent every year.
On the other hand, for a new saver, who is aged 30, to reach a retirement pot of Sh5million at age 60, they need to save around Sh2,400 every month, assuming the interest rate still remains at 10 percent every year. This shows that for one to play catchup, they will need to more than triple the monthly contribution which might be an uphill task considering the responsibilities that arise as we age.
I will downsize my lifestyle in retirement, so I don't need to save as much
While some expenses may decrease in retirement, others, such as healthcare, may increase. Underestimating your retirement needs can lead to financial difficulties in your later years. It is better to overestimate and save more than retire without enough cushioning.
I will rely on my children to support me in retirement
While family support can be invaluable, relying solely on it is risky. Circumstances have changed and with the increasing number of jobless graduates doubled with the tough economic times, your children may be unable to provide the support you need. Retirement planning ensures that you won't be a burden on your loved ones and can maintain your desired standard of living.
I will work forever and won't need to retire
Many Kenyans plan to work beyond retirement age, either out of necessity or choice. However, health issues or technological advancements in the job market may overtake your skills, forcing you to retire earlier than planned. Having a robust retirement savings plan in place provides a safety net, allowing you to retire comfortably regardless of unforeseen circumstances.
My employer's pension plan will be enough
While employer pension plans are a valuable component of retirement savings, for the majority of Kenyans they often aren't sufficient on their own.
A pro tip would be to assess your employer/employee pension contributions and calculate whether they will meet your retirement goals. If not, take proactive steps to bridge the gap with Additional Voluntary Contributions (AVC). For the self-employed, you can open an Individual Pension Plan (IPP) and start saving for retirement at your own pace.
I do not earn enough to save for retirement
On a modest income, set aside small amounts regularly. This will add up over time. Remember the power of compounding interest? The key is consistency. Look for areas where you can cut back on expenses and redirect those savings to your retirement account. Utilising automatic contributions can also make saving easier.
Relying solely on investments for retirement income is risky due to market volatility. A sudden downturn could significantly reduce your retirement funds or wipe it out. Diversifying your retirement plan with stable options, such as a pension plan, can help mitigate these risks and ensure a more reliable income stream during retirement.
Professional financial advisers can provide valuable insights, help you set realistic goals, and create a tailored plan that aligns with your retirement objectives. In turn helping you maximise your savings and investments, ensuring a more secure financial future. Start early, save consistently, and seek professional advice to ensure you achieve your retirement goals.
