How to save for a comfortable retirement
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
12 May 2024
Two follow-up
questions came out of last month’s article about saving for retirement
(21st April2024). The first is what percentage of income one
should save in order to accumulate the required ten times of annual
income. The second one is whether taxation affects the amount the amount
to be saved.
There is a quick way
of determining the answer to the first question. Suppose you are going
to work from the age of 25 and retire at 65 years, that is, a total of
40 years. It is easy to see that, for you to have 10 years of income,
you need to save at least 25 per cent of your earnings every month.
But that assumes that
your income does not increase for the 40-year working life! That’s
obviously unrealistic. Suppose that your get a 10 per cent increment
every year; at that rate your income on the final year of work will be
about 41times what you started with.
If you consistently
save 25 per cent of your income every month over your 40-year working
life, then your savings will accumulate to about 110 times your starting
income. That is, just two-and-a-half times your last annual income. That
isn’t good enough for a “comfortable retirement”.
But we haven’t
factored in the interest income. When we add it at the rate used in the
previous article (8.3 per cent), we find that your savings will grow to
about 334 times your starting income. In other words, your will have
kitty that is over 8 times your final year annual earnings.
Now that’s
encouraging. But, applying last month’s calculations, 8 years equivalent
income will last only 13 years. However, if we consider that, after
retirement, your financial requirements will be less that when you were
working, this money might be enough to keep you going “comfortably”
until you die.
The question of the
effect of taxation depends on where you are going to put your retirement
savings. If you put them in a regular high-interest savings account,
then normal income tax rates will eat into the interest earned.
If you put the
savings into a registered retirement benefits funds, you will enjoy
preferential tax rates when you start withdrawing your money.
Furthermore, you will also enjoy tax exemptions when you are working:
the money you save is deducted before your income is taxed.
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