HOW TO PLAN FOR YOUR RETIREMENT

Retirement is the next phase in life after work. It is inevitable that ALL of us must retire from active work someday in the future, so it is important to prepare how one will live their lives and meet their financial needs even after their productive age.

 Surprisingly, majority of persons in the present generation who are active participant in the labor force are not prepared for retirement and some do not even care. The GOBanking Rates survey of 2019 carried out in the United States on retirement revealed that about 64% of Americans working population will retire broke because they have not planned and saved for their retirement. In Africa, a 2016 survey by Old Mutual showed that 80% of black South Africans do not save and invest for their retirement. And in Nigeria the situation is gloomier as the incomes of many Nigerians are generally low and there is no social security system to take care of the aged people as well as the working population who might be out of job due to injury that incapacitate them from working for a period of time. Another dilemma for Nigerian worker that incapacitates them from planning for retirement is the large size of their family and extended family members who depend on the worker for both survival and medical emergencies giving the poor health system in the country. I will be guiding you on how to overcome these obstacles and jumpstart your retirement planning in this piece.

 What is Retirement Planning?

According to Stanbic IBTC Pension Managers, retirement Planning involves all activities from your first employment, up to and after your retirement geared towards ensuring that you and your needs are well provided for in the retirement phase of your life. So, retirement planning is the process of determining your retirement income goals and the actions and decisions you need to take to achieve these retirement income goals. It involves identifying your retirement income needs, estimating retirement expenses, saving up, investing the saving and managing your investment risks.

 It is important to note that you should start planning for your retirement right from the day you resume your first job. As noted above, many of us and young people in the workforce do think that retirement planning is for old people who are mid-way in their working life or who have spent most of their active working life and are about to retire. This is a great financial ignorance that must be corrected to prevent many of these current generation of labor force from retiring broke and living in miserable after retirement.

Why Retirement Planning is Important

Retirement planning has many benefits which are highlighted below for your knowledge.

·        Planning your retirement ensures that you fully enjoy your retirement life. Some people retire healthy but died immediately after they retire because they never planned for their retirement while in active working life, so it became difficult for them to eat good food and access the good medical care they were used to when in active service.

·        Retirement planning brings peace of mind. The topic of retirement can cause some stress to some people and many do not like hearing about it because they are not prepared for it. However, planning for your retirement puts you in control of your future and eases this stress.

·        Retirement Planning gives you tax savings. Another way of avoiding taxes without breaking the law is through your pension savings. In Nigeria, the pension laws exempt the savings you make to your Retirement Savings Account (RSA) from payroll taxes, hence, saving you money from taxes.

·        Retirement Planning sets stage for you to Plan for your Estate. Many people die without a written will that states how their assets will be distributed among their heirs and this has caused serious in-family fighting and destroyed relationships after their death. With retirement planning, you will plan your estate and get a will in place that specifies how your assets will be administered after your death, therefore, prevent confusion among your family members.

·        Retirement Planning helps you to Take advantage of the Compound Interest Effect: The money you save and invest as part of your retirement plan earns interest over time, and the interest earned earlier will also begin to earn interest, therefore, making your savings to grow faster over time. This growth is all a function of time, hence, you need to start planning and saving early to enable you enjoy this compound growth in your income.

Practical Steps to Plan for your Retirement

I have provided below some practical steps that you will need to take to plan for your retirement.

·         Your Retirement Savings Account (RSA) in Nigeria: if you are working in Nigeria, then you have a basis to begin your retirement planning. The Nigeria government has a defined benefit contribution pension scheme where the employer and employee jointly contribute a proportion of the employee’s income into the employee’s RSA. In addition to the compulsory contribution, the employee has the right to make additional contribution to his/her RSA called Voluntary Contribution (VC). It is important to follow up with your employer and ensure that your employer complies with this pension law and remit your pension contributions to your RSA account every month. Specifically, your employer must contribute 10% of your monthly gross earnings while you contribute 8%, totaling 18% to be paid to your RSA monthly. I urge you to take advantage of the VC and direct your employer to further deduct an amount of money that you want to save as part of your retirement plan from your salary and remit to your RSA. This will ensure that you retire with large amount of savings to cater to your needs after you quit working. Note that the 50% of any savings you have accumulated in the RSA account as VC is treated as contingent and can be withdrawn after two years while 50% is added to your RSA balance to be enjoyed during retirement.

·        Determine your Time Horizon: Your time horizon is the current time now to the time you are required by law to retire or you plan to retire. Knowing your time horizon is the basics for retirement planning. For example, let us say I wish to retire at age 50 and I am currently 35 years; this means my time horizon is 15 years and my retirement planning must be based on 15 years’ time horizon. I hope this is clear. If you determine your time horizon and find that it is long; i.e 10 years and above, then you can take higher risk by investing in risky assets such as stocks, which are very risky but provides higher returns over time. If on the other hand, you have a short time horizon like say 8 years to retire, you can not take higher risk so you have to invest your pension savings in mostly risk-free liquid assets such as bonds and money market investments. The demerit of having a short time horizon is that you will not be able to invest in riskier assets like stocks which traditionally can yield higher returns on your retirement savings. That is why it is strongly advised that everyone should start planning for retirement from the day you resume on your first job of your career. The amount of income that you will have in your retirement depends on your time horizon and how early you start. Let me give you example of two persons in which one start saving at age 25 and the other start saving for retirement at age 35. Lets say both are saving and investing N100,000 each towards their retirement and the annual growth return is 5%. Let us further assume that they plan to retire at age 60.

From this compound interest table below, the smart young worker who started saving for his retirement earlier will have retirement income of N10,062,813

Year Savings/Investment (NGN) Resulting Income (NGN)

25 100,000 105,000

26 100,000 215,250

27 100,000 331,013

28 100,000 452,563

29 100,000 580,191

60 100,000 *10,062,813

 Let us look at how much retirement income the older worker who started saving for retirement at 35 years old will have.

 Year Savings/Investment(NGN) Resulting Income(NGN

35 100,000 105,000

36 100,000 215,250

37 100,000 331,013

38 100,000 452,563

60 100,000 *5,366,913

From the above table, you can see that the worker who started preparing for retirement at age 35 will retire with a retirement income of N5,366,913, which is less than the retirement income of the smart young worker who started at age 25.

 What else do I need to say about the importance of time horizon to your retirement planning? All I need to say again is start planning for your retirement NOW, if you have not started.

 Determine your Retirement Income: Estimate how much income you will need to live the comfortable life that you plan to live when you quit working. The retirement incomes of people differ according to their financial and family situations at the time of their retirement. For people who will not have children in school at any level of education, they will need less retirement income that people who will retire but still have children in either secondary school or university. Also, someone who retires to their family home will need less money than people who will retire in a rented apartment as the later will still be paying rent while the former will not. Your life expectancy will also determine how much retirement income you need to have. The average life expectancy in Nigeria is around 50 years. You need to factor in this while estimating your retirement income. Your state of health will also determine the amount of income you need to prepare with heading to retirement. Someone who has health frailties will need more income to spend on medical care than someone without health issues.Ultimately, your expected retirement expenses will determine how much income your  need to save as you head to retirement.

 The sources of income one will have at retirement are usually four: Pension from your retirement Savings Account (RSA) and ; Rental income from real estate properties; personal retirement Savings and business income. It is unfortunate to state that most people who retire today depend on only one source(pension) of these incomes to survive because they never planned for retirement while they were in active service. As a result, many retirees are going through untold hardship as the amount of money they collect from as pension is not enough to cater to their needs. Investing in real estate properties while you are in active service can be a life saver as it will serve as a good source of income at retirement. It is also advisable to plan to start a small business during retirement. But not everyone can do business, so know yourself and plan accordingly.

 Estimate your Retirement Expenses: Knowing your retirement expenses will help you to now how much retirement income you will prepare with. There is general believe that one’s expenses will reduce when one retires. This is not always the case as some people’s expenses surge during retirement. However, as a rule of the thumb, you are advised to assume that your monthly expenses in retirement will be up to 70% of your present active life expenses.

 Start Personal Retirement Savings: Saving and investing are key to having a successful retirement life. But how what percent of your annual income should you commit to saving yearly for your retirement? It is recommended that one should save between 10% to 15% of your annual income if one desires to retire well. This savings rate is not cast in a stone as those who are starting out late to plan for their retirement are advised to save as high as 20% of their annual income to prepare for retirement. There are some advanced retirement savings products for individuals that can be invested offshore in case your country of residence is experiencing poor economic prospect and you wish to shield your savings from the poor economic outcomes of your country. You can consult us for this product if you want to grow your pension savings offshore.

 Investing for Retirement: You need to invest your retirement savings in long term investments that will make your savings to grow and produce the income your need for retirement. Some people think that saving money towards a project is enough and they forget the fact that such savings can be invested to achieve growth. It is not enough to save until you have found the right investment where those savings could be invested to grow. I will emphasize that your investment style for retirement will largely depend on your time horizon. For a younger, investment in very risky assts like stocks will be fine, but for an old worker, this will not be the right investing style as they can not take the high risk associated with stocks. I will share some of the investment opportunities where you can invest your retirement savings in to grow.

1.     Mutual Funds: Mutual funds are a pool of funds contributed to by several investors, which is invested and managed by a fund manager who is responsible for sharing the returns on the fund to the investors who invested in the fund. Mutual funds are a very good way to achieve risk diversification because the fund manager invest the fund in different classes of assets such as bonds, shares, and money market instruments. There are many good investment companies that offer mutual funds products in Nigeria. Some very good recommendations are United Capital Plc, FBN Quest, Stanbic IBTC asset management Ltd, and ARM Investment. You can open mutual funds account on their website and send in your documents and begin to investment your retirement savings right away.

2.     Bonds: Bonds are fixed income investment asset that pay you a fixed interest on the amount of money you have invested over the period of the investment. The interest payment on bond does not change even if the market interest rate changes. For example, if you buy a Federal Government of Nigeria bond that agrees to pay you 10% interest rate per year, this interest of 10% per annum will remain the same over the tenor of this bond investment. The government will not change this interest rate; that is why bonds are called fixed income securities. Bonds can be issued by both governments-Federal or state and private companies who wish to raise funds from the public. Investing in bonds is good for your retirement planning because bonds are the invest with the lowest risk profile. In fact, bonds issued by the Federal government are described as Risk-Free Assets. Investing in bonds can done using digital tools such as investment mobile applications that are Licensed by Securities and Exchange Commission(SEC). In Nigeria, you can invest in bonds using investment apps like Cowrywise and wealth.ng and PayDay investor.

3.     Stocks: The stock market provides a great investment platform for retirement investing because investing in stocks require that investors have long time horizon. This is because stocks are the riskiest among all the investable assets due to market volatilities and investors may have to hold their investment for long period of time to weather wild market fluctuations. Ultimately, stocks offer higher returns on investment than mutual funds and bonds do because of their high risk nature. There are very good stocks that you can allocate some of your investment savings to achieve higher returns. Food and beverage companies stocks and telecommunication companies stocks are great stocks to invest in for long term growth. You can open stock brokerage account online with www.mytradebook.com or meristem securities to start investing in stocks.

4.     Real Estate: This is the development of landed properties such as houses, shopping malls, office apartment for the purpose of profiting from property value appreciation and earning rental income. Real estate investment inflation-proof investment that can provide good rental income to the retiree who invest in it. The first rule of investing in real estate for retirement is that, every retiree should first own their home to avoid spending their retirement incomes on rent. Everyone must strive to retire in their own family home. Do not retire in a rented apartment. After owning your home, you can now begin to acquire land and build properties to put on rent. You can also invest in real estate through Real Estate Investment Trusts (REITs), which sales shares in units to numerous investors and pool the funds to buy land and develop estates which are rented out to tenants. The proceeds collected from those tenants are distributed to the investors as dividends. The popular genuine REITs in Nigeria are UPDC Real Estate Investment Trust, Union Homes and Sky Shelter real estate trusts. Whatever time horizon is, I advise you to strive to hold real estate asset while heading to retirement.

Get Your Estate Planning: Estate planning means deciding how you want your assets to be shared when you die. As part of your estate planning you will need to write a “Will”  which will specifically state the names of your children and other beneficiaries whom you want to inherit your assets when your are no more alive. Regardless how much you have as assets, you need to plan for your estate so that they will be no confusion and misunderstanding among your family members regarding the distribution of your assets. Estate Planning can be so complicated so I advise you should consult a financial consultant to help you out with this.

 Diversify your Risks: Retirement planning involves trying to predict the future and because we do not know the future with certainty, it is a risky adventure. That is why you need to know about risk diversification so that you can practice it when saving and investing for your retirement. Risk diversification means not putting all your eggs in one basket. It means spreading your retirement savings in different investment assets so that if there is bad performance in one asset, the good return performance in the other asset will help to prevent your capital from being burnt. I have discussed some of the investable asset to invest your retirement savings in. And Risk diversification requires that you should spread your retirement savings among differing investments which may include real estate, mutual funds, bonds etc. You can choose to diversify your risk in this proportion- 50% Real estate; 30% Bonds and 20% Mutual funds. Do not ever invest 100% of your retirement savings in one investment like say 100% real estate, no matter how good the investment looks like.

CHALLENGE ASSIGNMENT

Do you have a retirement plan? I have set out retirement plan worksheet here to enable you prepare your investment plan. This template includes all elements of retirement planning such as time horizon, determining retirement income, estimating retirement expenses, etc.

1.Retirment time horizon……………………………Life Expectancy………..….

2. Retirement Income……………………………………..

3. Estimated expenses at retirement(i.e 70% of current exp)……………………………… 

4.Retirmnt savings(at least 10% of income if 25 years and 20% above 25 yrs)……………………

5.Retirment Investment: Real estate(…%)…………….. Mutual Funds(…..%)………………….

 Bonds(….%)………………………

 6.Estate planning: A Will state your assets and state how you want them shared among your children.

 You are required to complete this retirement planning work book and derive your actionable pension plan right away. Remember to be honest to yourself and fill it with the best true information about you.