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 making 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 are 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

Actuarial Analyst Zamara Actuaries, Administrators and Consultants Limited

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