Don’t just negotiate a salary; negotiate your pension as well

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

24 July 2022

Two weeks ago, I explained why pension payments from the NSSF are so low. Upon reading it, James Kariuki – who had asked the original question – followed up with this one: How much would I need to contribute if I wanted to get a pension equal to my salary after retirement?

There is an important detail that was left out of the previous article: employers also contribute an equal amount to the NSSF kitty. Thus, the total contribution is Sh800. Thus, the expected payment is double the figure calculated last week; that is, a monthly payment of about Sh3,720 every month for 20 years after retirement.

To answer Kariuki’s current question, we need to do the calculation in reverse. We start by asking: if you wanted to get, say, Sh100,000 per month for the next 20 years from a savings account that earns 6 per cent per annum, how much would you need to save in it? The answer comes to about Sh14 million.

The next question is this: if you wanted to save Sh14 million over a working period of 25 years with 6 per cent interest per annum, how much would you need to put aside each month? The answer is about Sh21,000 monthly.

This seems feasible; even though setting aside 20 per cent of your salary over such a long time is quite a tall order. But there is another catch: If you are earning Sh100,000 per month in your retirement year, it is totally unreasonable to assume that this is the pay you started off with 25 years ago!

If we assume that you were getting, say, a 10 per cent increment every year, it turns out that you would have started with a salary of about Sh25,000 per month and this grew gradually to Sh100,000 over the 25 years. Obviously then, you could not have afforded to put Sh20,000 monthly in the pension for most of your working life.

Even if your employer was matching your contribution, Sh10,000 from Sh25,000 is still impossible! In short, you cannot save enough in a pension to get a payment equal to your retiring salary…

Unless your employer is generous: in my first job, the employer was contributing 3-for-1 and a few years later this was increased to 11-for-1! Yes! I was contributing 2.5 per cent of my salary and the employer 27.5 per cent to make a total of 30 per cent. The lesson here is that, when negotiating a salary, do not forget to negotiate your pension as well.