How to prepare for retirement as a small business owner

The process of planning for retirement can be draining and uncomfortable but if done properly, you can retire at any age. [iStockphoto]

Retirement means different things to different people. To some, it is when they reach the maximum working age which on average is 65 years, while to others, it is when they have accumulated enough assets such that the returns from their investments meet all their expenses.

Financial independence after retirement requires planning and commitment. After spending most days of your working years creating wealth, sustaining yourself and taking care of your loved ones, cushioning your sunset years is the best gift you can reward yourself.

However, according to the Retirement Benefits Authority (RBA), only 21 per cent of the working population allocates money towards pension schemes leaving at least 12 million people with no form of retirement or social security fund to rely on when they retire.

With the rise of the inflation rate which hit 9.6 per cent in October 2022 and tough economic times resulting mainly from the rise in the prices of food, transport, housing, water, electricity, gas and other fuels, the consideration of retirement has become particularly harder for small business owners who make up about 45 per cent of the working population.

The process of planning for retirement can be draining and uncomfortable but if done properly, you can retire at any age.

Kenya Orient Life Assurance Limited Head of Life and Pensions, Benedicto Makena, shares some tips for small business owners on how to financially prepare for retirement.

1. Start early

Personal finance 2022 by Investopedia estimates that a household requires up to 80 per cent of its current income during retirement to maintain its lifestyle, therefore, begging for the need to start saving early.

Time is the biggest force in investing for your retirement because you have more time to take advantage of compounding interest as a wealth-creation tool. When you start investing for your retirement in your early years, you will have less pressure thus making the entire process easy while at the same time enjoying more years before you decide to retire. Use this time to save and invest as much as you can so that you can easily and quickly achieve your retirement financial goals.

Due to the power of compound interest, saving for retirement can start with as little as Sh50 which with financial discipline can increase tremendously over the years.

2. Consult a financial expert

The advancement of technology has made it easier for people to consistently save for retirement. With this advancement, you need to be well informed on financial planning and the various avenues you can use to prepare well for your retirement.

Financial experts also help you review your goals, create better plans for your retirement and give you more information to help you make sound financial decisions while planning for retirement.

3. Set solid financial goals

Financial goals are the long-term, short-term and intermediate goals that form the basis of a holistic financial plan. The best financial goals should align with your values and personal objectives.

When planning for your retirement, it is important to identify the financial goals you want to have achieved, categorize them into short and long-term then strategize on how you will make them happen. Decide how and where you want to live post-retirement, the lifestyle you want to lead and be disciplined enough to work towards achieving it.

This process will require resources and a calculated financial path to keep you on track. Simplify your goals into small milestones to track them and revise them as you see it fit based on your progress.

4. Have a debt payment plan

Who wishes to retire and still be paying off debt? As you seek to plan for retirement, do not forget to have a plan on how you will settle all the debt. This includes credit card debt, car and mortgage loans, and/ or any student loans.

The important thing is to prioritize your finances in the years leading up to retirement to help you make the most of the money you have. That means paying off your highest-cost debt and the debts that have the potential to derail your golden years while also continuing to invest for your retirement. You do not want to be in retirement while still paying off debt.

5. Explore different retirement plan options

Various retirement saving plans are tailored to suit the needs of those in both the formal and informal sectors. The National Social Security Fund (NSSF) offers saving options for those in employment and those who want to contribute individually.

Alternatively, you can opt for an individual pension plan where contributions are made voluntarily, and you get to enjoy tax benefits.

There are also micro-pension plans like Mbao Pension Plan by the Retirement Benefits Authority which provide avenues for individuals to save from as low as Sh20 and the money contributed is invested collectively to yield returns.

6. Join an umbrella pension scheme

Running a small business may mean that you have employees who are also working towards their retirement. The cost of time and funds to start your pension scheme for your employees can be a hassle. You can therefore outsource the management of your pension funds by joining an already-registered pension scheme.

An umbrella pension scheme, such as Kenya Orient Umbrella Pension Scheme, is a fund that collectively puts together the retirement investments of several employers into a flexible plan. It reduces the average cost of running the fund and helps employees achieve a decent and secure retirement benefiting both you as the employer and your employees.

Attaining your financial goal requires consistency and discipline in setting aside money towards your future. Remember that retirement is inevitable, and the best friend of retirement planning is time. It is never too late to start planning for retirement, start now!