Do Not Overthink Retirement Saving #Kulegalega

In the last post, I confessed that even for me, saving for retirement is really hard. This is because of a number of factors, top of which is the fact that my present financial concerns override concerns for the future. Others are psychological:

• I will make it big in the future so I will not need a retirement nest egg, or,
• With inflation and all, what will my little savings amount to really?

I proposed that we start thinking of retirement saving like a back-up plan.  It is ok to make great plans and be hopeful about the future, but a back up never hurts. We now know the theory, let us look at what to do about this theory…

Does your employer offer pension as a benefit? Many employers, including the smaller businesses now have a voluntary pension benefit, where they match your contributions to a registered pension scheme to a certain percentage. This can range from 2.5% – 7.5% of your gross salary. What this means is that if you contribute 2.5%, the employer adds 2.5% to that amount, so in effect you save 5% every month towards your retirement.

I have however observed that most employees choose not to take this benefit, because it is optional and it means less money in the pocket today. Start by changing that. It really is free money on 2 counts:

1. Your employer is giving you tax-free money, it is like a pay rise you do not have to negotiate for;
2. Contributions of up to 20,000 shillings per month are tax allowable. This means you are paying yourself even before the tax man touches your pay.

If you do not have a company pension scheme, ask for it next time you have a performance review discussion with your employer.

Start with an amount you will not miss. With no employer scheme in place, I’d recommend you set one up yourself by signing up with one of the registered pension schemes. The registration process is painless, and all you then need to do is ask HR or the accountant to deduct the monthly amount from your pay, and remit it to the pension scheme.

Alternatively, set up a standing order from your account directly to the pension scheme. If you go this route, remember to give the payment information to the accountant so they can incorporate it in your tax calculation – you want to avoid a situation where you overpay your taxes. Just like the case with the employer’s pension, your payment is tax allowable.

How much should you start with?

It depends on how old you are. For example, if you start off in your 20s and someone else does in their 30s, the older person will need to save close to double of what the younger person is saving, for them to end up at the same point at retirement.  Since we are dealing with a mental block here, start with an amount you will not miss. How much do you spend on a weekend out, or on make up in a month? Save that. Trust me, you will find the alcohol or make up money elsewhere (we always do).

Can we say if you are younger than 25, you start with 2,000 shillings a month, and if you are older than that, 5,000 shillings a month? That is doable…

This post is one of a series sponsored by the Retirements Benefits Authority, as part of the #kulegalega campaign, aimed at educating us how pension funds work and the importance of starting to save for retirement while there still is time.