Whether you’re an old vibrant civil service officer, an entrepreneur, or a young horn venturing into the Nigerian Labour Market system, amping in the Rockies, golfing, or relaxing by your pool, a retirement that suits you takes planning. The better prepared you are, the more likely you are to achieve your goals, whatever they may be. Here’s how to plan your retirement in 4 steps.
Step 1: At what age will you retire?
That’s the question! If you don’t have the answer, it’s hard to plan anything. Indeed, it is the age at which you retire that will determine the time you have to save and ensure your financial security. To help you decide at what age you can apply for your retirement pension, Jobberman Nigeria suggests following these highlighted points while you read this article;
- Do you still receive a salary and do you still contribute to Nigeria Pension Plan Commission (PENCOM)?
- How many years have you been contributing?
- How much are your contributions and how much retirement pension should you receive?
- Can you rely on other sources of retirement income?
- Are you in good health?
- What do you plan to do when you retire?
Other factors may also play a part in the decision to withdraw from active life, in particular the arduous nature of the work or health problems. That said, as a general rule, the sooner you leave the workforce, the less money you will receive. The reason? Public annuities and supplemental pension plans as well as the interest on your potential investments will be lower, and as life expectancy increases, by retiring young, you risk living longer than your savings.
Step 2: What will your financial needs be?
Do you want to maintain your current standard of living once you retire? In this case, the majority of financial planners estimate that you will need about 70% of your average gross annual income for the last three years worked: this is called the replacement rate. So, if your annual income is N600,000 during this period, you will need N420,000.
How do we arrive at this figure of 70%? Once you retire, some expenses will disappear. Likewise, you will no longer pay employment insurance or group insurance, and you will pay less tax. Finally, some work-related expenses will have disappeared, your parental responsibilities will generally be lighter, and you may have finished paying off your mortgage or any other loan you might have accrued while working.
That said, the “70% rule” is not unanimous among financial planners. Especially if your annual income is high or you have substantial savings. In this case, 60% or even 50% of the amount you currently earn could be enough. If you have earned higher than average income, say N800,000 a year, you can get away with a replacement rate of 60 or 65 percent. In reality, it all depends on the type of retirement you are planning. This is a good starting point to start thinking about. But as you get closer to retirement and have a clearer idea of what you want to do – travel? to live in the countryside? volunteering? to work part-time? – it is better to adopt a budgetary approach. You have to say to yourself “I want to do this, this, and this.”
Others believe that the 70% mark is too low and that, to maintain an acceptable standard of living, the future retiree should rather aim for 75% or even 80% of his income. Moreover, we have to be logical. If your gross annual income for the last three years is less than N300,000 and you have to pay rent or repay a mortgage, for example, you will likely need more than 70% of your income to meet make ends meet.
Step 3: What income can you count on?
The income you will need in retirement may come from public plans, a supplemental pension plan, and your savings. In general, the proportion of each of these sources of income varies according to the age at which you will retire and your average income during your career.
Public plans: Government plans provide basic financial protection. The retirement pension from PENCOM indexed annually according to the cost of living, the Old Age Security pension, and the Guaranteed Income Supplement, if you are entitled to it, are the three sources of public revenue that will contribute fund your retirement. However, even combined, they will only provide you with a certain percentage of your average annual career income. If you want to know the amount of your pension, contact PENCOM and ask for your statement of participation. This document will tell you, in particular, an estimated amount of the pension that you could receive from the age of 65, the standard age of retiring in Nigeria
Don’t rely on government programs alone to insure your old age, as they can change over the years. And if you are powerless against inflation, interest rates, stock market fluctuations, and taxation, you can always take the action today that will improve your quality of life in retirement: save!
- Supplementary pension plans (RSA or pension funds): your income will be increased if you benefit from a pension plan with your employer, thanks to the contributions paid during your working years. There are several types of Retirement Savings Account(RSA) and each has its characteristics. Ask your employer for more information, in particular on the age of eligibility for retirement and the expected amount of the pension. Also, check with your successive employers.
- Your savings: to live a comfortable retirement, you will probably have to rely on your savings, registered or not, or on your assets (main residence, cottage, rental or business income, etc.).
Five practical tips for a smooth transition between working life and retirement:
- • Try to have an overall view of your retirement project. To help you, you can consult a financial planner. Involve your loved ones in your reflection
- Take an interest in all questions related to retirement, for example by attending information sessions given by your employer or your financial institution, by consulting a psychologist, or by obtaining information from PENCOM
- Pass on your professional experience to younger generations, in particular through mentoring or by getting involved in organizations as a volunteer.
- Always anticipate in your budget the possibility of unforeseen expenses, for example for medical or hospital care
- Be patient and realistic: some risks cannot be covered, especially in times of economic crisis.
Step 4: How much do you want to save?
You will be able to determine your savings goals once you have estimated your foreseeable income and compared it with your needs, for example around 70% of your average income for the last three years of work. At first glance, the equation seems simple: estimated expenses – foreseeable income = need for savings. In reality, things are a bit more complicated! Indeed, you will also have to take into account two things:
- Inflation, i.e the increase in the price of consumer goods that will apply to your savings. An important “detail”, since in 25 years, and according to an annual inflation rate of 3%, spending N10,000 today, for example, will represent nearly N21,000, more than double.
- The duration of your retirement. As life expectancy continues to increase, you may spend a lot of time in retirement.
What if your income is insufficient?
Public schemes only cover part of retirement needs. So if you earn around N500,000 a year, they will replace nearly 40% of your income. If you are aiming for a replacement rate of 70%, you will therefore have to rely on private plans (employer pension plan, and the likes) or on your savings to make up the difference, to at least, 30%.
The problem? Even though the average retiree only replaces a little over half of their previous income, a significant percentage of current retirees do not have sufficient income to do so. In this case, there is no miracle recipe. If your retirement income is not up to your ambitions, you will have to review your budget. You can then choose to increase your income by returning to the labor market part-time, for example, or choose to reduce your expenses on an ad hoc or permanent basis. There are several ways to modulate a budget; if you have difficulty, our article here helps you to make a family plan.