Lessons on planning, from driving, books and other everyday things

“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

Are we saving enough for Retirement?

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

Starting early and saving for a longer period is better for you

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

Is there a Pension Puzzle that needs our attention?

MONEY is a word that resonates well with you (unless you are living under a cave). SAVING is a word that your parents, teachers or relatives always (probably) talk to you about. PENSION, RETIREMENT is a word that you probably don’t take seriously (or you do, if you are ready to retire). Hi there, this is a 25-year-old millennial writing to you about pensions and retirement. Did you know (through a survey we have undertaken of the retirement benefits industry in Kenya): Around 20% of the employed population is covered by a retirement benefits scheme. This is equivalent to around a 3.2 million people in Kenya.  However, the vast majority of these simply participate in the NSSF to which a very low level of statutory contributions currently apply and too low to support an adequate retirement benefit.  There are around 20million people who are excluded entirely from any form of retirement benefit coverage. One may ask why we should care about these 20million people, it is because they have no means of living a dignified life after they stop working (Now this could easily be you or your parents). This may mean that poverty among the future elderly will soon emerge as the driver for global poverty and an increase in dependency on the working population and youth in the future. Assets in the retirement benefits industry have risen at an average rate of around 12% per year over the past 10 years to approximately K Shs 1.2 Trillion in December 2018. Most of the monies are put in traditional asset classes like fixed income assets (like government securities, fixed deposits, corporate bonds, etc) and equities. On average 95% of individuals who leave employment opt not to preserve their benefits and take the maximum available under the legislation as cash. This cash is fully utilized in less than 3 years (after leaving employment) on businesses that end up closing-down or on emergencies like children’s school fees or re-paying a loan. Retirees are making sub-optimal decisions and are able to replace only 34% (on average) of their earnings before retirement as a pension per month, when the should ideally replace 75%. It is quite clear that our retirement benefits industry is growing and has its challenges. When comparing our retirement benefits industry with those around the world, there are similar challenges. Even though global pension assets crossed the USD 40 Trillion mark last year, global coverage and adequacy of pensions even in the developed world is a challenge. In Bangladesh, only 9.2% of working age population are covered and in places like Nigeria, South Africa and Indonesia, the figures are 5.2%, 3.7% and 8% respectively. This is mostly due to illiteracy in areas to do with Finance and Retirement, which is a universal challenge. Around the world, the concept of saving for one’s retirement does not resonate with the person and this is especially true with the youth. In the USA, the American College of Financial Services conducted a survey for those nearing retirement and in retirement, on retirement income planning and it was revealed that 75% of the respondents failed a 38-question retirement planning quiz. A UK Adult Financial Literacy Capability Survey found that 22% of people in the UK are unable to read a bank statement and 40% do not understand the impact of inflation on the real value of money. The current situation of the retirement benefits industry in Kenya is puzzling. In every puzzle, it is expected that the pieces are put in a logical manner to successfully complete the challenge. In the case of the pension puzzle, we have identified pieces of the puzzle that are already fitting well, pieces of the puzzle that need re-ordering or re-fitting, pieces of the puzzle that are missing and pieces of the puzzle that need to be hit (by a hammer) on to the puzzle. We believe the pieces touch upon each of the following categories:
  • The adequacy challenge
  • The role of investment strategy
  • Improving at retirement decisions
  • Delivering value to members and effective member engagement
  • Rethinking pensions
In this series, my colleague and I will be taking you through each of these pieces in detail to outline the problem and how we can solve this pension puzzle. By Arth Shah –Lead, Research and Development – Zamara Kenya

A challenge of pension adequacy

Hi there, this is 25-year-old millennial writing to you about pensions and retirement.

In a previous article, I took us through how the retirement benefits industry is doing in Kenya, and sadly, the current situation of the retirement benefits industry in Kenya is a puzzle.

And like every puzzle, the pieces are supposed to be laid out in a logical manner to successfully complete the challenge. In the case of the pension puzzle, we have identified pieces of the puzzle that are already fitting well, pieces of the puzzle that need re-ordering or re-fitting, pieces of the puzzle that are missing and pieces of the puzzle that need to be hit (by a hammer) on to the puzzle.

The first piece of the puzzle focuses on the challenges of pension adequacy.

A Pension is a monthly income that the retiree would receive from their retirement savings.

Adequacy in simple terms is the state of sufficiency.
Therefore, pension adequacy is when a retiree has sufficient monthly income to live a good retired life.
Experts of the retirement benefits industry around the world say that a sufficient pension is between 60-80% of the retirees last salary i.e. if the retiree last earned Ksh 100k per month then a monthly pension of between Ksh 60-80k is sufficient to live a good retired life.

From a survey done by Zamara that comprised of over 60,000 members of retirement benefits schemes, it was found that only 7% will have adequate pensions when they retire. (Dramatic Pause to allow that stat to soak in) The other 93% will be struggling to make ends meet during their retired life if they don’t have other retirement savings. You could be among the 93%. Below I outline a simple thing you need to do now to change the situation or bridge the pension adequacy gap.

Set a retirement goal

At the beginning of every year, we set ourselves a few goals for the year and these may range from something that gets your adrenaline rushing like bungee-jumping off a cliff to something that is relaxing to the mind, body and soul like sitting at a beach and reading 3 books.

There is a rule of thumb that says if you want to succeed, you need to set goals. Setting goals gives you the focus and direction to succeed. This rule of thumb is applicable to everyone and for any purpose. Imagine trying to open-up a business and you have no goal set. You will not be sure on whether having profits of a few thousands or a few millions is successful.

There is merit in setting a goal. The goal should be designed to be SMART i.e. Specific, Measurable, Attainable, Relevant and Time bound.

For a recently graduated 25-year-old like me, who also started working, thinking about retirement is nowhere near my list of accomplishments. But subconsciously I have already set a retirement goal. This is to lie down on a beach bed in my beach house sipping a martini with my wife next to me as we listen to the tides hit the shore.

To ensure that I meet this goal, I need to save for my retirement so that I can afford to buy that martini and the beach house.

As you think of your retirement goal, think of how you are going to achieve it and the answer will be start saving or investing. Here’s a simple tip on saving for retirement if you are in your mid-20s, save between 11% and 15% of the salary you earn. The magic number on how much to save for a mid-20 year old lies anywhere between 11% and 15% of your salary to get you to your sufficient pension at retirement.

It’s always better to consult a financial adviser/pension expert to get more personalized recommendations, but if you are not able to or don’t want to then ensure you are setting aside at least 10%.

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

Managing your medical expenditure

Below are options that you may consider in regards to managing your expenditure going forward depending on the benefit;
  • Utilize the appointed provider panel as the rates are negotiated/discounted
  • Take advantage of the direct access to specialists e.g. pediatricians, gynecologists, and dentists to avoid repeat visits to general practitioners.
  • Where practical, choose your providers wisely-Level B and C hospitals appointed by UAP Insurance are cost-effective and up to standard in terms of service delivery.
  • Review your bills before signing them to avoid cases of over-billing from providers.
  • Seek a second opinion, especially for prescribed procedures to ascertain whether it is necessary.
  • Where possible, make use of hospital packages (for example maternity packages) that give more value for money.
  • Enroll in Chronic Disease Management Programs and Drug Delivery Programs which offer treatment at subsidized rates.
  • Use your NHIF membership to subsidize your medical cover.
  • Participate in the scheduled health talks & wellness events to enable you to take charge of your health.
  • Make use of our free nutrition (improves diet) and counselling services (avoid/deal with stress). Practicing healthy living and incorporating exercise in your schedule helps to avoid the need for medical treatment.

  • In case of further queries, kindly do not hesitate to reach out to the Zamara team through the dedicated hotline; Dedicated Resource- 0726755492; Call centre Number- 0709 469111; Zamara Toll Free Counselling line: 0800-221-HELP (0800-221-4357)