My name is Charles. I am scheduled to retire from work in January 2025. I expect to come home with a lump sum salary of Sh3 million and a monthly pension of Sh65,000. How do I invest this money for a comfortable post-retirement life with the same standards I currently live by?
Benjamin Cheruiyot – Engagement Director at Abojani Investments, a personal finance and investment advisory firm
Planning how to spend your time in retirement depends on your knowledge, skills, and active job experience. One should determine an interest to pursue years before retirement.
Using personal networks in recruiting can help create a thriving business while still on the payroll. Cases of retirees losing their retirement savings due to “get rich quick” schemes are common.
Others fall into the lure of rentals, spending all the lump sums on projects without detailed construction cost plans. The result is incomplete structures, tied up funds, and worsening distress.
In retirement, the bills barely change when the paycheck stops, yet the monthly pension does not match your last paycheck. You need to downsize your lifestyle because inflation will always reduce your purchasing power.
The first thing is to maintain comprehensive medical insurance. Aging attracts lower body immunity, especially with underlying conditions.
Don’t carry your job title to retirement. There are many cases of retirees who retain their employer-funded benefits before retirement. You can no longer afford frequent travel because fuel costs are constantly rising.
Eating expensive food will also drain your money. If possible, limit outsourcing services that you can perform yourself.
If you have a farm, agribusiness requires proper market research so that you do not get stuck in production. If done well, there are endless opportunities to create wealth.
Adding unlimited value to agricultural products will also give you a market ready to satisfy you. Your skills and passion, even in the off-season, will determine your success.
If you have a country house, you can move and enjoy country life where you will grow your own food and significantly reduce your cost of living, along with eating healthy. Living in the city is expensive and may prevent you from pursuing other interests.
Look at your expected expenses. Working with a budget will help you figure out whether a monthly pension of Sh65,000 will be enough or if it may force you to move inland or to a lower cost location.
Since you expect to pay a total of Sh3 million, will this last you long? Assuming you don’t have cash-flowing investments, this amount is only worth less than four years of your expected monthly pension.
With inflation, this could decline further. You need to invest this amount to earn more benefits that will make you last longer. Investing in a safe but meaningful return vehicle such as government bonds will earn you regular income.
To cover regular expenses or short-term projects, you need to put a portion of it into an easily accessible account, such as a money market fund. Sh3 million in MMF network at 12 percent per annum will earn you Sh30,000 per month.
If you invest in treasury bonds or infrastructure bonds with a return of 18 per cent per annum, you will earn Sh270,000 every six months. This averages Sh45,000 per month.
While government debt instruments pay higher interest, your capital is not available to you for the duration of the bond.
Short-term instruments such as Treasury bills almost match the returns of money market funds. If you choose the latter option, your combined monthly income will be around Sh110,000.
Deciding to invest in bonds depends on your retirement plans. If you are looking to get into a business or agricultural venture, you may not have much left to invest in the capital markets. Compare the returns on these passive investments to your own business.
You can also get an income withdrawal plan from your life insurance company. You can give them a lump sum to manage for you and then receive fixed payments on a schedule of your choosing.
You may also consider dividing the lump sum into different investment parts (bonds, Sacco, MMF, high yield stocks) to avoid putting all your eggs in the same basket, as well as ensuring regular payments in line with your financial needs.
However, since you will receive a monthly pension of Sh65,000 in addition to the lump sum, you will have the luxury of investing Sh3 million in a long-term instrument (such as infrastructure bonds) and will have Sh65,000 to live on. On budget and short and medium term goals.
Don’t lose sight of the regularity of your Sh65,000 monthly income to the point that you neglect the principles of sound personal finance management. Avoid high financial risks such as debt as much as you can.
One of the biggest mistakes retirees make is using their retirement benefits to start a business. Research shows that up to 48 percent of new businesses opened by retirees are unprofitable, while 21 percent of those businesses started with a lump sum investment collapse.
Don’t deduct money from your lump sum to start a business unless it’s a business you’ve been in for a while and have a list of clients willing to convert.
While the lump sum can be used as a source of capital for a company that may successfully support you after retirement, the risk of unwisely depleting the funds is very high.
Managing cash flow in retirement is highly recommended. You should not hesitate to work with a planner to adjust your portfolio allocation according to market dynamics and future economic forecasts.
If you have any financial problems, send us an email to (email protected) and leave your contact number. Financial questions will be answered in this column.
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