Here’s what will determine your financial state when you retire


Retirees who do not have other cash flow sources other than pension are less resilient even when they have large holdings of other assets

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Last week, I mentioned that your passive income should have hit up to 80 per cent of your active income salary by the time you are in your early forties. This is indeed a hard nut to crack for most people because financial planning has not been entrenched as a natural way of life in many families, and has not become an “inheritable” tradition, especially in low and middle-income families in Africa, unlike in Europe and parts of Asia.

For example, the typical tourist families who visit our country’s game parks and coastline are not high earners. They are ordinary people with ordinary incomes in their home countries, but save for a holiday for a year or years. These cultures encourage life and financial planning.

Achieving a substantial passive income in your early thirties and forties works only for employed people who take on investing early in life and give money enough time to work. For example, a strong savings culture in a sacco in the early twenties may enable one to make substantial borrowing for investment or even to access a mortgage or capital commitments. The resultant investment cash income reinvested works magic, while the non-cash income (capital growth) can be cashed out as an equity release loan to undertake further investments.

People who engage in self-employment and or business as careers earlier in their lives tend to start with more cash flow difficulties, but build more passive income for cash flow than employed individuals of the same age bracket. Unlike employed people, they tend to experience cash flow gaps earlier in life and more frequently. This pushes them to consider options for smoothening the cash flow through investment income. Besides, they also tend to appreciate the benefits of investment income comparatively earlier and commit to lifestyles that support lower social spending in these phases.

Once you cross 50 years, your investment period is significantly reduced, and risk appetite begins to diminish, particularly once you are past 56 years. Depending on your state of health, your asset holdings can change substantially. In a nutshell, retirement means that you start earning lower regular income from pension, compared to your last salary income, while the cost of living continues rising. At this time, your ability to take on assets that do not promise consistent cash flow depend on the amount of extra cash you can access from your present asset holdings such as rent

Retirees who do not have other cash flow sources other than pension are less resilient even when they have large holdings of other assets. For example, most employees tend to invest in undeveloped land during the active employment phase. Upon retirement they come face to face with the cash flow drought when they realise that lenders can no longer offer them credit to develop those assets without evidence of other source of cash income other than pension.

Retirement in Kenya begins in the eighth phase of life (50 – 56 years) in the private sector and in the ninth phase (57- 62 years) for civil servants. Either way, retirees begin to really feel the effect of aging after hitting 65 years. Energy levels begin to decline, and other health frictions begin to show up in reflection of lifestyle choices in the younger ages. Cash flow needs also rise as medical demands grow. People who retire while having younger children experience increases in cash demand as the children graduate into high school and colleges.

There are many social choices one must make while travelling the journey of life. Make savings and investment choices that compliment them as you grow older, remembering that some of these choices have lifelong consequences.

Patrick Wameyo is a financial literacy coach at Financial Academy and Technologies, and an entrepreneurship coach at The Entrepreneurship Center EA. [email protected]