Analysis: MAXWELL PHIRI
WHETHER you want it or not, one day you will retire and stop earning that income you are receiving now because the only number in the world that does not go down is the age of a human being.
A country’s inflation rate and a bank’s interest rate may go up and down, but your age only goes up, entailing that there is an invisible goal called retirement which is patiently waiting for you. The question I would like to throw to you is, have you started planning for your retirement? Or are you waiting for your employer to plan for you? What a miss!
There are two components to retirement income planning, that is, personal planning and financial planning. Personal planning is important because it is the determining factor of your satisfaction with your retirement lifestyle. How do you continue keeping your mind busy, and also what will make activity during your retirement period to avoid getting into depression or going into an unknown world?
Financial planning is crucial because it identifies your sources of income and expenses, and establishes your retirement budget, based on your personal plan.
All too often, people entering retirement do not place enough emphasis on personal planning to ensure they maximise their opportunities. So, take the time now – at an early stage in your planning process – to think about the choices you have about how you would like to spend your time during retirement.
Do you want to volunteer at a local hospital? To take up that hobby you were always interested in, but never had the time for? To go back to school and pick up a few special interest courses? To start your own business? To travel around the world? Or to buy property in a warmer climate and spend the winter months there?
These and many other lifestyle questions based on your preferences are all important factors to consider when planning your retirement since your choices will drive the financial circumstances that must be met in order to achieve your goals.
Will you have adequate funds to provide the kind of retirement lifestyle you envision? Remember, your income will likely come from three general sources: Government pensions, employment-related sources and your own personal investments.
Your retirement will be more enjoyable if your income is structured to fit your lifestyle choices and if you have developed a retirement plan to protect the assets you have worked hard to acquire.
Follow these foolproof steps to retirement income planning:
1. Conduct a personal asset assessment twice in a year by comparing your income and expenses to determine any shortfalls or surpluses.
2. Review and analyse the various retirement income strategies.
3. Review and compare the retirement income options available.
4. Finally, develop an action plan.
In order to plan for your retirement early, and thereafter retire smiling, we need to inculcate the culture of saving during our working life. The following principles will help to enhance our saving culture.
1. Budgeting: First, you need to create a budget. I know what you are thinking about, but before you can even dream about saving money you have to know where your money is going. There’s simply no way around it. How can you decide where to make cuts or find extra cash to save if you have no idea where all of your money is going?
You do not have to make it a chore. In fact, many successful people get through life without tracking every single coin each and every day. You have to sit down and find out where your money is going. How much is being spent on airtime, housing, utilities, groceries, debt, and entertainment? Once you have created a clear picture of where your money goes in a month, you can begin to spot trends and problem areas. After you have found the problem areas, you will have a better idea of where you can cut back on your unuseful expenses and by how much. Thereafter, you can use that money for your savings.
As you can see, the idea is to paint a picture of where your money is going and it isn’t so much about tracking every single Kwacha you spend throughout the day. Yes, that can also be a helpful exercise to keep spending under control, but that’s also what turns most people off budgeting after just a few weeks.
2. Paying yourself first: After you have identified where your money is going, you should have a few spare Kwachas put aside into your savings. That’s a great start, but there’s another secret to saving money: paying yourself first.
You have probably heard that phrase before, but it is so common because it works. If you are like most people, you probably wait until your monthly income hits your account. You pay the bills and buy the weekly groceries before deciding how much you can afford to deposit into your savings. By then, the amount may be small and you are worried you might need those few Kwachas later in the week so you avoid saving any money at all. Big mistake.
You need to think of your savings just like you would on any other bill. When your electric bill comes each month, what do you do? You make sure it gets paid, right? That is how you need to treat your savings account. If your goal is to save K500 every month, then think of that as a K100 bill that needs to be paid. If you are thinking about this in terms of a bill, you are more likely to make that deposit and build up your emergency fund.
Just thinking about your monthly savings as a bill isn’t enough, and that’s where you have to pay yourself first.
You need to create an automatic savings plan that will automatically deposit money into your savings account before you even have a chance to spend it. This can be done right through your employer’s direct deposit or with a recurring transfer with your bank through a monthly standing order by debiting your payroll account and credit your savings account.
3. Spend less than you earn: This is the biggest milestone to adopt in Africa; spending less. We are so extravagant with our hard-earned income and within few days, we become broke and run into kaloba (shylock or money-lender arrangements with high interest). Spending less is key in handling personal finances. If you cannot utilise this principle, you will never be able to save money. You simply have to spend less money than you earn and there is no way around that. It is all about cash flow management. Always bear in mind that what you cannot buy with cash is not yours.
If you earn K5,000 monthly and spend K5,100, meaning that you are at – K100, where does that extra K100 come from? Usually, it’s borrowed money, either from a credit card or some sort of loan.
Guess what? That borrowed money comes with interest. That means you are actually more than K100 in the hole. As you begin to do this on a regular basis, month after month and with large amounts, it is easy to see how someone can get thousands of Kwachas in debt, which is exactly why most people feel as if they don’t have any money to save.
As this debt mounts, you may find yourself just making minimum payments each month, but that, in turn, just means you will be spending the next 10 or 20 years paying for something you could not afford, and actually spending thousands on interest alone.
Do the above principles sound like common sense? They should. Most of us know that we need to budget, put money aside for future use, and stay out of debt, but we fail to do that. Unfortunately, short of winning the lottery, there are no principles to building wealth. These three principles are the foundation of good personal finance.
One thing is certain. If you can budget adequately so that you begin spending less than you earn and put some of that money into a savings or retirement account before you have time to spend it, you will be able to save money and build wealth.
Remember, my goal is to ensure that you do not just retire, but you retire smiling.
It’s never too late you can start now!
The author is director – human resources and administration at the Rural Electrification Authority.