Planning for a retirement is always an uncertain enterprise without the proper guidance and advice from experts within the pensions ecosystem. With the right information, however, one can have an effective plan towards retirement. In the subsequent paragraphs, I will share some critical things one must consider in planning for a good retirement.
Retirement planning is like life insurance
It helps when you look at it as a hedge against the absolute worst-case case scenario – needing a capital reservoir to survive on when you’re old or becoming physically incapable of working after 60 (which is usually the case for a lot pf people).
For most of us, planning for our retirement is important but not urgent. As humans, we tend to focus on things that are urgent and pressing, sometimes to the neglect of things that may not be urgent but are very important. Retirement planning tends to fall in this category as we perceive it to be far off. However, it’s much closer than we think, and we need to start taking it seriously.
Traditional retirement usually spans about 10 to 20 years. To ensure that these years are not bittersweet, it’s better to plan ahead. Here are three reasons why you should start investing and planning for your retirement from the day you start making your first cedi.
Financial commitments needed.
A major reason why you should start planning for your retirement early is because the longer you wait the more money you’d have to set aside (per month) to meet your goals. Let’s look at a real-life scenario. Take for example two 25-year-old friends, Adjoa and Akua, both with similar aspirations of having one million cedis in their retirement accounts by age 60. Let’s assume a fixed rate of 15% per annum compounded monthly for the next 35 years and both commit to put some money aside monthly.
Adjoa starts putting money aside monthly from age 25. From future value analysis, she would have to put aside GHS 69 monthly till retirement to realise her GHS 1m dream at age 60. Akua on the other hand decides to start at age 35. For her to also achieve the same GHS 1m on retirement, she would have to commit GHS 309 monthly. Which is almost four and a half times more than her friend, Adjoa, had to commit on a monthly basis.
From this scenario, you’ll realise that time and compounded interest play a key role in getting more money. As such, if you start early, you will not have to commit so much as compared to starting much later.
No! You shouldn’t rely on your children!
You may have heard the adage that take care of your children and when they’re older they will in turn take care of you. As young people, it’s time we revisited the conversation. As it stands now, a lot of young people are struggling to earn a decent living. Most are now finding their feet. Imagine putting your burden on an already struggling person and calculate the odds of disappointment.
If your children can afford to support you – power to you! However, to avoid disappointment, you need to plan for your own retirement. Be independent of your children and relieve them of that extra “burden”. This will only be possible if you put in place the right investments to be able to meet your needs at retirement. Remember, for most people especially those in the formal sector, there will be no more salary coming in after age 60. It is therefore imperative that you make some very important plans from the beginning to be able to meet your expenses at that age.
Health costs at old age.
Don’t underestimate the health cost at old age. Your medical bills at the latter part of your human life tend to be way higher than when you were much younger. Remember, at that time you may not have a company medical cover and you would have to foot the bills yourself.
If you speak to people currently on pension and relying on their SSNIT repayments, most of them complain about how small their inflows are and how tough it is to live on these payments, especially when they have to add medical expenses to it. As at January 2020, there were some pensioners earning as low as GHS 300 per month. I highly doubt that would be enough to even take care of your basic needs, more so medical bills.
In conclusion, don’t be passive about retirement. Some people don’t check on their SSNIT, Tier 2 Pension and Provident Fund contributions to see if their employers make them and are prompt about them. Be different. Make time to check all of these and ensure your statements are up to date. If you’re self-employed, you can join master trust schemes. Above all, you must also go beyond this and invest for yourself.
Always remember, you either create the kind of retirement you want, or you accept the type that’s thrust upon you. Somehow, I doubt you’d want that.
Cheers to a happy retirement!
By Desmond Bredu
The writer is an Analyst in charge of Operations Pensions at Stanbic Investments Management Services. He has ACCA and MCSI.