My name is Joshua. I’m a retired teacher expecting around Sh3 million. I am also expecting a monthly pension of between Sh27,000 and Sh30,000. I have thought of long-term investments like rentals but I’m unhappy about the investment recouping period and the cost of land and materials. I am afraid of misusing my lump sum pension and am wondering how to invest it. Please guide me.
Benjamin Cheruiyot, the Engagement Lead at Abojani Investments, a personal finance and investments advisory firm, says:
At this time, your retirement income determines whether you will maintain your lifestyle or degrade it. With monthly pension payments nearly half a retiree's last salary, how would you make up for the deficit? Keeping up with suburban living will need regular income that also keeps up with increasing lifestyle costs.
Well chosen, inflation-proof investment instruments will provide you with cash flow in your retirement. It is often advised that one should not undertake huge capital expenditure projects at retirement. Don’t make this mistake.
There are many incomplete structures dotting the landscape due to underestimation of project costs and a yearning to outdo peers despite a weak resource base. Many retirees also carry their job titles into retirement and seek to make a statement by buying a 3000 cc luxury SUV similar to the company-maintained model they had. Others purchase prime plots in upmarket neighbourhoods and struggle with costly building plans. Yet still, others start businesses without well-conducted market surveys or personality traits and business grit needed to successfully manage the enterprise. With traditional business models changing towards e-commerce, a not-so-computer-savvy retiree would lose opportunity. Don’t make these mistakes.
Ideally, you ought to carve some niche years before retirement. Using your networks in employment can help you set up a thriving business while still on the payroll. Building rentals on an existing prime land is viable. But in your case, buying a 50x100ft plot can cost between Sh2 million and Sh2.5 million, depending on location. Putting up seven standard-sized bedsitters will cost you another Sh2.5 million. As you have only a Sh3 million lump sum payout, this will be a difficult option. Real estate returns an average of 9 percent per annum. You would need 11 years to recoup your investment. Location is another factor you should consider, lest you contend with vacant units and a wrong market. You don't want to get into medium-term credit secured by your monthly pension.
Investing Sh750,000 in a money market fund would earn you Sh5300 monthly (after 15 percent withholding tax) on a 10 percent annual interest. Money Market Funds are liquid, thus enabling you easy access to some cash when the need arises. The balance of Sh2.25 million can be put in an infrastructure treasury bond with coupon rates at 17 percent per annum. Since the interests are paid twice a year, you will earn Sh191,250 every six months. These two instruments give a monthly income of Sh37,175 which is higher than your expected monthly pension payments of Sh30,000. Your monthly total will now be around Sh67,175. Out of this figure, you can secure your retirement by getting proper medical insurance. Note, that treatment for underlying conditions (which are more often in advanced age) can be quite costly in the absence of medical insurance and financial cash flow.
Also read: How pensioners spend retirement lump sum
Evaluate what consultancy services within your academic profession you can get, even on a part-time basis. This will insulate you from boredom and the ‘past sell-by date' that can sometimes creep in after retirement. Starting a small shop at your home can be tempting, but don’t get into it just for the sake. If there are no consultancy services available, check on the easy-to-do side hustles you have been successful at. For example, dairy farming. These can then be gradually ventured into from the savings out of your monthly income without impacting your primary investments. Remember also to budget the Sh67,175 you will be getting monthly for investments. For example, a part of this income can go to a dividends-earning Sacco account. Finally, try as much as possible to stay out of unnecessary debt and liabilities.
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Money questions will be answered in this column.