For many young people, the idea of ??saving for retirement seems like something that only needs to be done when one is much older, more settled, or has paid off debt. But then we hear a scary statistic highlighting that only 2% of Ghanaians can afford to retire financially independent. This is a truly disturbing statistic and something that needs to be changed for the better over time. Financial independence is defined as not needing financial support from family, friends or the government.
The big question is when should one start saving and investing for retirement? The answer is simple, the sooner the better. Head of Global Markets at First National Bank, Kofi Pianim, said contributing even a small amount to retirement savings now can be very beneficial in the long run. Using an example, he explains why it's better to start saving for retirement sooner rather than later. “Let's look at the typical example of Mr. Bankson who is targeting a lump sum of GHS 2,000,000 in retirement to give him a sustainable income of GHS 6,666.67 every month after retirement until the age of 85.
Assumptions:
Retirement Goal: GHS 2,000,000 Current Retirement Savings: Nil
Return on investment: 19.00% (Policy Rate) Retirement age: 60
HOW MUCH SHOULD YOU SAVE PER MONTH?
Retirement savings Starting age Required monthly contribution (GHS) Additional required savings due to delay
20 27.80
30 158.99 131.19
40,929.17,770.18
55 21 064.88 20 135.70
*Numbers are illustrative only and in real terms or "today's money"
From the above, if one starts saving for retirement at the age of 20, one should save GHS 27.80 every month until retirement. If this decision to start saving is postponed for another 10 years (start at the age of 30), it is necessary to save GHS 158.99 every month. At the age of 55, you need to save GHS 21,064.88 every month.
Here, the earlier one starts saving for retirement, the more one can benefit from the effects of compound interest. This means that the interest is compounded over a long period of time. Kofi shared some things to consider when it comes to retirement:
What are your retirement goals and how much do you need for those goals?
For example, someone who wants to travel regularly in retirement will need more in retirement than someone who wants to stay at home.
Continue to budget in retirement
Take a critical look at your budget now and see how much of these expenses will last until retirement. For example, groceries will continue until retirement, but travel to and from work will not.
Ensure increased health insurance and spending in retirement
Getting older generally means more medical expenses, be sure to factor that into your budget. Medical inflation is notoriously higher compared to consumer price inflation; therefore you have to account for it.
Make sure you invest in the right solution for the right time horizon
The solutions you invest in must match your needs. Some solutions protect you against the risk of outliving your pension and other solutions do not protect you against longevity risk, but give you the flexibility of the income you choose each year. Do your research and get advice from properly qualified and registered financial service providers.
Protect your retirement savings
When you change employers and have a pension fund from a previous employer, keep your pension savings in one of the vehicles available, such as a preservation fund or a new employer pension fund. The reason most people don't retire comfortably is because they don't keep their pension when they change jobs. This will help achieve the compound interest effect and is a good practice in the long run.
The next step is freeing up cash to contribute to your retirement goals. Get back to the basics of budget control and see where you're spending your money. “Using a tool that tracks your spending will give you insight into what you're spending on and where possible help you redirect some funds into your retirement savings if you have an allowance,” Kofi added. First National Bank has a wide variety of savings and investment banking offerings; life start, savings, fixed deposits, cash register, transfer and call accounts.
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