By Evans Ongwae
You are young and recently employed. You plan to fully enjoy life, maybe buy a number of items over the next few years and lead the lifestyle you’ve always desired: A flashy car; an impressive house; a powerful home theatre system with surround sound; a respectable smartphone; some fashionable, trendy clothes; and of course, some money in the pocket for travel and entertainment.
Then there are those basic needs you can’t run away from: Food, utilities, and medical care.
You ask yourself why you should bother saving for retirement when you’ve just started earning and retirement is many, many years away.
But then, why shouldn’t you?
Or maybe you are doing short-term jobs (gigs) that come along, and you see your income as barely enough to allow you to put aside some amount as pension savings. You therefore ignore and tell yourself that you will start saving for retirement a little later when you have a steadier, bigger income.
Well, pension advisers hold a different view.
They consider joining a registered retirement scheme early the best move you can make, however small your earnings. They argue that you don’t have to commit mountains of shillings to your pension every month. You can save the little you can summon, depending on your basic needs and financial goals. It could be as little as Ksh500 a month or whatever amount you can afford. Any amount, even as little as Ksh20 a day, is better than nothing at all, they say.
If you thought you must be employed on permanent and pensionable terms to join a retirement scheme, think again. Times have changed. Even the self-employed can join a pension scheme. If you are in gig jobs, you qualify to join a registered individual pension plan. Maybe you are a freelance electrician, a welder, a mason, a trader, a musician, or a painter; you will find a registered pension scheme you can join.
Joining a registered pension scheme has many advantages. We’ll share a few of them here to give you the picture.
If you are employed on permanent and pensionable terms, take advantage of your employer-sponsored retirement scheme. Consider this: If you put away Ksh10,000 every month for your retirement and your employer matches that amount, you’ll have saved Ksh240,000 a year. If your employer is more generous than others and contributes more towards your pension, you’ll have a much bigger pot when you retire.
Will you be better off not saving that amount and lose out on your employer’s contribution? This is simple mathematics. Your employer’s Ksh10,000 (for example) every month totals to Ksh120,000 annually. Without factoring in an annual increments and compounded interest, this will add up to nearly Ksh4.2 million in 35 years. If you factor in salary increments and interest, the figure improves massively.
Know that pension contributions are eligible for tax relief – up to Ksh20,000 each month. Wouldn’t you benefit from this provision from the government over a long period?
Time is money
You probably have seen or heard of indigenous trees that take ages to grow. You can’t give a baobab two years to mature. This tree needs time to be fully grown. Now, your pension funds also require a long time to grow substantively, because, seriously, time is money! The longer you save, the more time your money has to grow through compound interest. Let’s say you invest Ksh1,000 every month from age 30 at a modest compounding interest rate of five percent per annum until you reach the retirement age – 65 years. Your high school friend chooses to invest a similar amount every month at the same interest rate, but 10 years later after you (at age 40).
You will have accumulated Ksh175,000, whereas your friend will have managed Ksh125,000. That’s Ksh50,000 less than you.
Shorten working career
Should you choose to make substantial savings towards your pension early in your career, your fund will grow impressively. If you grow a big pension fund while still young (by saving a lot each month and even adding voluntary contributions along the way), you may be able to retire early and enjoy a longer retirement period.
Surveys by the Retirement Benefits Authority (RBA) show that many young people delay joining pension schemes. Others fail to save for old age, or save too little to sustain their expenses after retirement.
Currently, pension coverage in Kenya stands at 21 percent of the total labour force, meaning that eight out of every 10 working Kenyans are not saving for retirement. If you are one of them, do something about it.