How to prepare for life after retrenchment or retirement

Early in my career between 1995 and 1997, Standard Chartered Bank led the way in Kenya and indeed in the continent in what is now popularly known in the corporate space as “right sizing”, retrenchment to you, which has become a way of life in the corporate world.

Over 2,000 people were systematically laid off in Kenya over a three-year period and were replaced by younger more technology savvy youth.

Retrenched staff from large government corporations such as Posta and Telkom were not adequately prepared to manage the lump sums they were sent home with. Many more did not have experience in producing alternative income streams.

This is besides the fact that they did not ‘accept’ their new status fast, which also introduced some psychological baggage with implications on financial choices.

Long period of uncertainty

Retrenchment and retirement introduce one to a mandatory financial behaviour change. What follows is a sudden discontinuation of regular monthly salary in the case of retrenchment or a significant drop in the same as the case in retirement. In the case of the employees retrenched from the government parastatals, the lump sum payment was also comparatively smaller relative to those offered by commercial enterprises.

Where a retrenched or retired employee already had poor financial management skills and a weak character with respect to self-management, the new situation ushered them into more confusion, a rapid change in life quality and attendant issues. We shall address these issues in a series of articles.

Three issues among others become of immediate concern once you receive that letter of disappointment terminating your employment contract. The first concern is how well you will manage the lump sum you are about to receive, over a long period of uncertainty.

The second is whether to touch retirement benefits or stay away, and where you have decided to touch the retirement fund, the issue of high taxation rates. All these issues require a quiet mind free from other stresses. A period of psychological transition to cool off emotions and to allow logical thinking to resume is recommended.

Alternative income sources

Retirement in Kenya begins at 55 years in the private sector, which in the eighth phase of life (50–56 years). Civil servants retire at 60 years, in the ninth life phase (57- 62 years). Early retirement is where one exits formal employment before turning 55 years, however taxation regulations only recognise age 50 as the earliest retirement age for taxation purposes.

For those retrenched before turning 50 years, taxation of retirement benefits is brutal. It is at the same rate used to tax your monthly salary, which has very narrow tax brackets and therefore very expensive.

Depending on your confirmed ability to generate extra income from alternative sources, the question as to whether to access your retirement benefits is a matter that must be considered against the amount of tax you have to pay immediately. While the former is a measure of your probability of success, the latter is a measure of immediate drain into your pool of resources and should be considered only when necessary.

Retirees with alternative income sources are always in a better financial situation. They have regular cash flow to rely on for economic activities and savings to fall back on in case things are not going well. The quality of life post retrenchment or retirement is directly correlated with your investment effort during the earlier phases of life.

Patrick Wameyo is a financial literacy coach at Financial Academy and Technologies, and an entrepreneurship coach at The Entrepreneurship Center Email : EA. Coach@financialacademy