My name is Eugene. My father will retire in December this year and will move to the countryside. He will receive a lump sum pension of about Sh2.5 million. We wonder how he can invest the money to better his village. During his working life, he has built some rental houses which generate some income. He also does some farming. We only have one brother in school, he is in grade two. My father wants to buy a tractor for farming. He is also thinking of buying a chainsaw or investing in dairy farming with the lump sum money. What is the best way to use this money so that he does not misuse it, become frustrated or go bankrupt?
Benjamin Cheruiyot, Head of Engagement at Abujani Investments, a personal finance and investment consultancy, says:
If your mom or dad was never in business, they shouldn’t start retirement, especially with a pension.
At age 60, their energy levels will be low, and they will feel frustrated from chasing debtors left and right.
Retirees should join a members club to socialize with other seniors and do some small farming projects to keep themselves busy. The monthly pension payments will cover small bills and meet social needs.
It is advisable to establish a niche for yourself years before retirement. Using networking at work can help you build a thriving business while you are on the payroll.
Therefore, planning to start a business after retirement depends on your knowledge, skills and experience.
Cases of retirees losing their retirement savings to “quick fix” schemes are common. Others fall for the lure of rents and spend all their lump sums on projects without detailed plans for construction costs. The result is unfinished structures.
Your father has experience in renting properties. He can improve the units for higher income or add some security guards.
Depending on the location, three to four units can be set up for Sh1 million, each of which can generate a monthly income of Sh10,000.
Agribusiness requires proper market research to avoid getting stuck in production. If done well, there are endless opportunities for wealth creation.
Adding unlimited value to the farm produce will also give him a ready market to cater to. His skill and passion, even in the low season, will determine his success.
Buying a tractor depends on whether he intends to use it on the farm or for work. It can be used for plowing, farming, transporting building blocks or sand, or even selling water. Help him study the market to make better decisions.
When you retire, your bills are almost the same as when you stop receiving your salary, but your monthly pension is not the same as your last salary. Your father will need to downsize his lifestyle because inflation will always erode his purchasing power.
The first thing to do is to maintain comprehensive medical insurance, as with age his body’s immunity decreases, especially if he suffers from underlying health problems.
Moving to the countryside, where you can grow your own food, would significantly reduce your cost of living, as would a healthy diet. Holding job titles after retirement is harmful.
There are many cases where retirees want to continue to enjoy benefits that were previously funded by their employer. They may no longer be able to afford frequent travel, as fuel costs continue to rise.
Expensive meals out will also put a strain on his finances. If possible, he should limit outsourcing services that he can do himself. His last child’s secondary school fees will be about Sh120,000, and there are also university fees.
With a total of Sh2.5 million, he is looking to live for 30 years or more on the interest generated. Is this enough for that long? Assuming a monthly budget of Sh30,000 and no cash investment, this amount will only cover seven years of living expenses.
With inflation, this amount may be less than that. He needs to invest this amount to earn more interest, which will make it last longer.
Investing in a safe but profitable instrument like government bonds will give him a regular income.
If you invest Sh2.5 million in a government bond with an annual return of at least 16%, you will earn Sh200,000 every six months. This equates to an average of Sh33,333 per month.
Adding this to your monthly pension, it might be enough to live on. Other options, such as money market funds, would earn you about Sh27,000 a month after tax in a fund that returns 15% per annum.
And remember, there are infrastructure bonds on the market that pay tax-free interest of up to 18%.
But his options are limited by the amount, and this hurdle could be overcome if he had savings built up that could be boosted by investments, especially in infrastructure bonds.
Take the time to understand the financial markets, especially Treasury bonds, because they are relatively safe and offer better interest rates.
If one chooses agricultural projects or adds babysitters, a capital of one million shillings may be sufficient.
The balance of Sh1.5 million can be invested in a money market fund at Sh16,000 per month or in treasury bonds at Sh120,000 every six months.
If you have any financial issues, email us at (email protected) and leave your phone number. Financial questions will be answered in this column.