Is cash in the bank a wise retirement plan?

The thought that one day after giving your productive years to your employer or investing in other income-generating activities, you will have to retire, can be scary.

It is this fear, to some extent, that pushes individuals to either retire early from their work to concentrate on their business or investment that will support them until their last day or put aside some money for the same purpose. It is also the reason the government has in place policies to ensure anyone who is formally employed has a portion of their salary matched with their employer’s contribution set aside for their retirement.

Such ensures the quality of life one lives during their heydays is not compromised upon hitting 60.

Apart from these statutory deductions, individuals have their own retirement plans. Some turn simple hobbies into businesses or run investments like leasing land or renting outhouses.

wise retirement plan

In absence of assets or business, the other option is just to set aside money for retirement. It is in this breath that we raise the question: is cash deposit a wise retirement plan?

And if your plan is to do cash deposits as your future source of income, how can this be done in a strategic manner and ring-fenced so that you do not end up dipping into your savings for emergencies?

According to the latest Wealth Expectancy Report 2021 by Standard Chartered titled ‘Bridging the Confidence Gap’ cash deposits happens to be the second leading source of income on retirement.

The report lists eight expected sources of income upon retirement where investment tops with 54 per cent. The second source of income, which is our focus is cash savings or deposits at 43 per cent.

Others are rental income 23 per cent, government pension (22 per cent), income annuity (21 per cent), and part-time work (13 per cent).

Interestingly, some 11 per cent have children and other family members as their planned source of income upon retirement while one per cent are yet to figure out.

In the research, the question posed to the respondents was: “Which of the following do you expect to be your key sources of income in retirement? And they were required to select up their top two.

Retirement readiness

“Retirement readiness also differs across markets: in Mainland China 61 per cent of consumers have not started saving for retirement, whereas in Kenya the number drops to 17 per cent,” the report reads.

The report collected feedback from respondents across Hongkong, India, Indonesia, Mainland China, Malaysia, Pakistan, Singapore, South Korea, Taiwan, United Arab Emirates and the United Kingdom.

The report adds that many are simply not going to meet their expectations if they don’t start to save and invest as soon as possible.

“Our data suggest that a proportion believe that retirement can be ‘put off’ if funds are not yet in place. However, this is fundamentally misaligned with the potential impact saving earlier can have on total retirement funds available in decades to come,” the report reads.

Just from these findings, cash deposits alone as a future source of income during retirement appears too fluid to be depended on due to the current state of life of many Kenyans marred with incapacities to meet their daily need let alone save for the future.

Mbithe Muema, an expert in personal finance, investment and a financial planning advisor who is the chief executive officer of Infallible Group, notes that if cash deposits is what one seeks to depend on upon retirement, then this has to be done wisely.

Ms Muema says when it comes to saving for retirement one would consider a long-term asset to match the period to retirement.

Get a long-term investment 

“Take an example of an individual whose retirement is about 20 years from today. The prudent way to invest for such a duration would be to look for a long-term investment that matures at near or about the period when the individual retires,” she explains.

Muema says Kenya has unique and tax-free investments that one can use to invest for retirement. She says the specific investment for this case would be an infrastructure bond which is issued by the Central Bank of Kenya (CBK).

“It is a long-term investment and it’s returns are tax-free,” she says. 

Such an investment, as she puts it, will ring-fence your money from any attempt from you to dip in now and then for emergencies apart from earning you some good returns annually.

“The last issuance of the infrastructure bond by the CBK in September 2021 gave investors a tax-free return of 12.80 per cent. What this means is that if one invested Sh1 million they would earn a return of Sh128,020 every year for the duration of the bond, which is 21 years. A decent return for a retirement product,” she says.

Prudent investment strategy

Muema says retirement will happen definitely and a prudent investment strategy would be to focus on investing in the long-term to avert instances of one needing to access the funds before retirement. 

“Cash savings are more suitable for short-term investment needs, and they tend to give marginal returns alongside being easily accessible,” says Muema.

The rates of returns however are smaller compared to the infrastructure bonds illustrated above.

She demonstrates that the savings rate in Kenya today is about 2.4 per cent per year.

“For the same individual who wants to put aside say Sh1 million for retirement in savings account they would earn Sh24,000. If you compare this to the earnings from the infrastructure bond of Sh128,020 then one can clearly see that using cash savings for retirement would mean losing out on Sh104,020 every year for a 21-year period,” she explains.

Muema adds: “Now that’s a massive loss of value. The infrastructure bond gives 5.3 times higher returns than a savings account.” When planning for retirement make your money work for you by investing in the right products to match your needs, she advises.

“As with any plan, it’s is a great idea to seek professional guidance on the best opportunities to avoid such costly mistakes as such as overlooking and forfeiting better returns for an extended period of time,” she says.  

A well written and articulated financial plan backed with financial models and smart financial goals is a great starting point for retirement planning. “Seek out a financial planner and get the right advice for your financial and investment needs so as to make the most out of your money,” says Muema.