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Question by XXX: I earn about K Sh 300,000. I save very little because all my money goes to school fees. I am in a dilemma, should I change my kids to cheaper schools to save for investment and retirement? Or should I ensure they get the best education and hope for the best in retirement? Is there a percentage guideline of how much I should spend on school fees?

Response:

BY GEORGE OYUGA

Dear XXX,

Thank you for speaking on behalf of many! The dilemma you are in reflects a deeper challenge that many people go through. It is a pointer to the question of whether success in life is determined by how much one earns or by how well one manages whatever amount they earn. I believe that the latter is true. Success and contentment in life is determined by how one manages the little that comes into their hands.

w You have mentioned that you earn about K Sh 300,000. I will assume that this is your monthly income because people rarely quote their annual or quarterly incomes. You have also not stated whether this is your gross or net. Having a view of how much you earn is a great thing as it puts your income into perspective. This is usually the first step in the art of budgeting. The next step requires you to take control of where your money goes. I am glad that in your question you seem to be exploring a solution that leans more towards controlling or adjusting your expenditure as opposed to agitating for an increase in your earnings. Improving your financial management skills will yield better results than a simple increment in your earnings.

Those who live their lives agitating for higher earnings always become restless, stressed, and impatient at their present workplaces. Financial literacy and being smart on money matters can be linked to better job satisfaction and employee loyalty. Poor financial management leads to discontentment, impatience, subconscious greed, corruption and crime.

Alternatively, one may end up living a miserable life feeling they are among the less privileged (overworked and underpaid), yet they in actual sense are among the few most privileged people in society today. I hope you appreciate that you are among the few top earners in Kenya today. Your earnings place you among the 79,909 Kenyans who earn over K Shs 100,000 according to recent statistics. This accounts for only 2.9 percent of the 2.7 million formal workers captured in the Kenya Revenue Authority (KRA) database.

I am also glad that you do not seem to be too happy with your level of investment or retirement savings. You call it very little. In your view, it appears that school fees seems to be taking the larger share of your expenditure. You have however not shared how it compares with the other expenditure lines that you incur on a monthly basis. I am sure you have other expenditure lines which fall into the categories of basic needs, wants, debts and entertainment among many others.

I feel that your problem revolves around budgeting. This will be best addressed by seeking the help of a financial advisor or financial literacy coach who will help you build on your budgetary skills. The art of budgeting requires a careful diagnosis of your entire earnings and spending patterns to weed out the unnecessary financial habits while strengthening what is financially helpful. The steps of budgeting will follow a carefully laid plan that looks into your income sources, tracks your expenditure patterns over an agreed period, helps you to decide on your current financial priorities and designs a new budget framework that suits where you are in your financial journey. For future success, it will teach you how you can always track your future expenditure and refine your budget accordingly as your circumstances change with your life stages.

A good financial planner, financial advisor or financial literacy coach will help you determine which budgeting pattern suits you. There are several budgeting patterns that range between the 50:30:20 rule, the 50:40:10 rule and the 70:20:10 rule which are commonly referenced. They help you to divide your monthly after tax income to determine what goes into basic needs, wants, savings, investment, insurance, debt, etc. • 50% (Basic Needs) :30% (Wants) :20% (Savings/ Debt) • 50% (Basic Needs) :40% (Savings, Debt, Investment) :10% (Wants ) • 70% (Living expenses) :20% (Savings, Debt ) :10% (Investment, Charity)

The outcome of this professional intervention will determine whether you will need to change the school your kids attend currently to a cheaper one or not. Do not be surprised if the diagnosis reveals that the solution to your current financial pain-point lies somewhere else in your other expenditure habits and patterns.

But kudos for being a responsible parent. Education is the best inheritance that a parent can accord their children. My only advise at this point is that you may need to take care not to over-spend in their basic education at the expense of saving for their future tertiary education and training. Try and save for these as the real school fees burden awaits you yonder.

Lastly, I hope you are not heavily invested in their education today thinking that you have them as your retirement plan. Your children are not your retirement plan! There are high chances that thinking of them as your fallback in retirement will backfire. Make separate retirement arrangements and you will thank me later!

The writer is a financial literacy trainer and General Manager in charge Umbrella and Retail Retirement Solutions at Zamara. He can be reached via goyuga@zamara.co.ke

“Keep distance – Stay Alive”. I read this statement as I was heading to the airport one morning, many moons before COVID took over our lives. Fortunately, I was in traffic (I was not driving and hence could not over speeding as my colleagues would claim is my normal). I was being driven and was thus able to read this bumper comment and had the chance to ponder over it. The advice which was written at the back of a large monster of a truck, very scary looking, was also in the smallest of prints, visible only in standstill traffic.

What did I make of this statement you may ask? Well, firstly, as I was behind a truck, I was acutely aware that most trucks have brake lights smothered in mud or faulty at worse, which means, you would not be warned if the truck had applied its brakes and if you don’t judge speed very well, you could end up driving into the back of the truck!. So over time, I’ve learned to ignore the brake lights and judge the speed of the truck, to determine if it is slowing down or not, to not drive into a truck.

On thinking about this statement as I continued my journey, it occurred to me that retirement planning follows a similar trend. We know (at least in the back of our minds) that we need to save for retirement, but we somehow find a reason for not doing so. A common reason has always been where do we find the spare money we can put into savings. Over the last 3-months, I have once again thought about that statement in the context of the COVID situation we are in.  I no longer go out.  Work and home have blended.  Shopping has been reduced to essentials, and window shopping no longer exists for me!

A wise Persian folk hero, Mulla Nasrudin Idries Shah, inspires me in this area. He takes on various characters to get his point across, whether it is to play the hero, or the fool or the sage, for as long as the message is transmitted, clearly, without any doubt.  Permit me to pick a leaf from his approach to explain.

As Kenyans, we are allergic to saving or planning for retirement. probably, in the usual Kenyan way, retirement is something that will not happen to me and hence no need to plan for the same.  The same applies to the preparation of wills or completing the nomination of beneficiary forms.  If we should, God forbid, attempt to do, the consequences would be dire.  To avoid dire consequences, we do nothing.  Am sure in days gone by, there were reasons for avoiding such activities, but in today’s day and age, it is necessary, like tea and coffee in the morning to ensure functioning.

If that is indeed the case, why do we insist on fire hydrants and fire blankets in kitchens – surely by Kenyan standards, this can never happen to me. Similarly, mosquito nets to protect against mosquitos, alarm clocks to get up on time, back-ups of data, etc etc.  The list goes on and on.
Getting back to the topic at hand, in everything we do in life, in work, in business, in the corporate world, we plan, we prepare – constantly, for the future. Be it change management, future strategy, take over strategy, we research, we test, we plan and we prepare in everything except retirement.

So why is it that for retirement, we insist on not planning? or is it we have planned? with the children and grandchildren? with the business established at retirement?  Perhaps that is the continent’s way, it’s in our genes? There may not have been formal retirement age, a formal retirement policy, a formal funding strategy, a formal investment strategy. but, I am certain, it existed in a form, that was suitable to the generation then.

COVID has opened our eyes in some regards – being at home, for almost 3 months. We are learning to better appreciate our family, having to change the way we manage our finances (especially for those who have been furloughed or made redundant), rethink our spending habits, taught us to teach (those with young children in school), taught us new skills – adapting and being more comfortable with technology, taught us to become farmers – those with gardens and vegetable patches) and for some of us, the inactivity is causing us to pull our hair out (yes, I admit, I have created a number of bald patches).  All in all, different problems call for different solutions. Different generations develop solutions that are appropriate for their generation.  The solution to the retirement and financial problems of today requires us to save, by physically setting aside funds, by investing those funds and then drawing on those funds for retirement or in situations such as the one we are all going through.  The next question would be, how much and when do I start saying?  Ideally, we should have started yesterday first with a budget to know where we are spending our money and hence determine where we can save.  We should contribute to our retirement savings plan (be it the one with our Employer and or our individual retirement plan).

It is important to remind ourselves that we cannot save in one day, it is a long term strategy and works when we are disciplined and consistent in our approach. As the Swahili saying goes – “haba na haba, hujaza kibaba”.

My final take-home of the statement I read at the back of the truck – If I don’t start saving for retirement or COVID type situations now, I might as well be a speeding car, destined to be in the back end of the truck, all twisted and mangled.
by Shera B G Noorbhai

In Kenya, the role of a retirement benefits scheme has changed from being a mere employment offering to being a crucial part of helping employees achieve their goal of financial independence. Over the past few years, the retirement benefits sector has grown at an exponential rate, with around K Shs 400 billion in assets in 2010 to K Shs 800 billion in assets in 2016 to crossing the mark of K Shs 1 trillion by the end of 2017. This represents a huge amount of savings into retirement and makes retirement benefit schemes one of the largest institutional investors in Kenya.

Even though large sums of money are saved for retirement, do Kenyans know whether they will have enough income after retirement, whether they will maintain their standard of living after retiring from work, whether and how they can improve their retirement income? Unfortunately, most Kenyans don’t know the answers to these questions. In fact, the age between 50 and 55 are the golden years when most Kenyans start questioning whether they have enough retirement income to live a decent quality of life after retiring, when their working life is almost over, which is almost always too late.

Given the increasing importance of retirement benefits savings, it has become more critical for Kenyans to understand what affects their retirement benefits savings, what their retirement savings are projected to be at retirement and how they could improve it to live a sustainable life after retirement.

For one to know whether they are saving enough for retirement they could estimate the rate at which their retirement income will replace their pre-retirement income. This is known as the Income Replacement Ratio. Around the world, financial advisors generally recommend a plan that targets an Income Replacement Ratio of 75% (a figure that would include all forms of post retirement income, not simply your company sponsored pension scheme). An Income Replacement Ratio of 75% would mean that an individual earning a pre-retirement income of K Shs 100,000 per month would earn a retirement income of K Shs 75,000 per month, as a pension for example. It is important to note that every individual has unique circumstances and needs to determine their own target based on their own needs. A target between 60% and 80% is probably enough for most people to maintain their quality of life after retirement and to meet the rising medical costs after they retire.

Zamara had recently carried out Income Replacement Ratio investigations for various defined contribution retirement benefit schemes covering over 60,000 members. It was found that on average a member will get a monthly retirement income of 34.0% of their pre-retirement income as a pension after retirement. This means for every K Shs 100,000 earned per month before retirement, a member will be able to replace 34.0% i.e. they will have a pension worth K Shs 34,000 per month. This is way below the recommended target and means that members will have to rely heavily on other sources of income to supplement their pension benefits.

Members of retirement benefit schemes aged above 55 are expected to have income replacement ratios between 0% and 25%. The reason for this is that these group of members had not saved enough for retirement or started saving at a later stage of their working lifetime or did not preserve their benefits when changing employers. The members of retirement benefits schemes aged between 25 and 35 years old are projected to have an average income replacement ratio of 42.6% at retirement. These group of members have ample time to improve their Income Replacement Ratio.

The factors that affect Income Replacement Ratios are the amount of contributions made, the rate of increase in salary, the investment decisions taken, the portfolio returns, whether the member preserves their benefits or not, the amount of time a member save for, the retirement age and the cost of the pension. I will be discussing these factors in more detail in my forthcoming articles.

But for now, let me ask, do you know whether you are saving enough for your retirement?
By Arth Shah –Lead, Research and Development – Zamara Kenya

From my previous article, it was noted that most Kenyans are not saving enough for retirement. In fact, we found out that on average a member of a retirement benefit scheme will only be able to replace 34.0% of their salary before retirement. This Income Replacement Ratio is way below the recommended range of between 60% and 80%. As a closing remark to the article, I had mentioned that the Income Replacement Ratio is affected by the amount of time a member saves for, among other factors. Note that when I say “save” I mean the monies should be saved in a retirement benefits scheme run by your employer or saved in an individual pension plan registered at the Retirement Benefits Authority and not stashed under the bed or the pillow.

In this article, I will take you through the importance of starting to save early and for a longer period of duration. First off, when it comes to saving for retirement, it’s never too early to start saving. In fact by starting early and staying invested, you can reap the advantages of compound interest.

Warren Buffet, among the richest in the world, said “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” Since we don’t live in America and most of us don’t have lucky genes, we have to rely on compound interest, which should be every investor’s best friend.

The concept behind compound interest is when the money earned from interest on your savings or investments is reinvested which earns further interest. In simple terms, it is “Interest on Interest” or “Making money on your money”.

The compounding effect on your savings is much better and more fruitful when the monies are invested or saved for a longer period. Below is a graph that demonstrates the impact of NOT starting to save early or saving for a longer period of duration for someone who saves K Shs 20,000 per month upto age 60:

*Note: the savings pot earns an interest rate of 7% per annum

From the graph above, a 20-year-old who starts working and earning a salary decides to start saving, he will have a retirement pot of approx. K Shs 50m at the age of 60. Out of the K Shs 50m, 19% is his savings and 81% is the interest earned on the savings. If he delayed saving and started when he is 30 years of age, he would have lost 53% of the K Shs 50m. This loss is because of not having saved for 10 years and the loss on the interest from saving. If he delays for a further 10 years and starts saving at age 40, then he loses out 79% of the K Shs 50m. Therefore, waiting to start saving can cost you a lot of money and have a major impact on your retirement pot.

Did you know, in Kenya, the legal age to start working is 18 years old. This means one can start earning a salary or open up their own biashara and start saving into their employer’s retirement benefit account or into a registered individual pension plan from age 18.

So what do you think is better: starting early and keeping your money invested upto age 60 or starting when you are 40 and accessing your retirement benefit at age 60?

By Arth Shah –Lead, Research and Development – Zamara Kenya