How much savings does one require to retire comfortably?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

21 April 2024

Robert Yawe posted this question on the X social media platform recently: “Just got told that, if I want to retire comfortably, I should have 10 times my last year’s income. Would this really be enough?”.

This is a question that disturbs many people in the 45+ age group. Suddenly, retirement doesn’t look so far away! And, at the same time, personal expenses starting increasing exponentially – children’s school fees kick in and medical bills for sickly, aging parents begin to bite. These high expenses mean that there is little money left to save for the future – let alone for investment.

Now, we don’t need to know Robert’s salary to do the calculations; all we require is the interest rate earned by the savings. If he can get 10 per cent per annum on his 10 years income (120 months), then every month, he’d earn one month’s salary as interest (120 x 0.1/12 = 1). In that case, his principal savings would never get depleted. But is that realistic?

I don’t think so. In 2016, I placed Sh3,037 in of the top-earning Money Market Fund (MMF) Unit Trusts and, today, the money has grown to Sh5,678 (after withholding tax). This translates to an average annual return of about 8.3 per cent over the 8-year period. This is a more realistic interest rate.

Using this 8.3 per cent rate, we find that, in the first month after retirement, Robert’s savings will earn the equivalent of 83 percent of his last monthly salary (120 x 0.083/12 = 0.83). So, he will need to top up the remaining 17 percent by eating into the principal amount. Thus, the second month will have slightly less principal sum and, consequently, earn slightly less interest.

I have done the projections and, it turns out that the principal sum will get completely depleted after 257 months – about 21 and a half years from retirement date. The question then is: will Robert still be alive 21 years after retirement?

Assuming that Robert plans to retire at 60 years of age; his life expectancy after retirement is about 17 years. That is, he is expected to live up to the age of about 77. At that time, there will be 38 months of salary (about three years) remaining in his savings.

But then, there is the question of inflation. As the cost of living increases, Robert will need to gradually adjust his lifestyle in order to protect his savings.