Personal Finance Series: Why and How to Start Saving for Retirement in your 20’s and 30’s

Saving for retirement is a topic not many Millennials or Gen Zers like to think about, let alone do. Many are of the view that the money they currently earn is not enough to sustain their lifestyle, talk less of saving it for something in the distant future. Another school of thought is to spend your money living “your life to the fullest” because, well YOLO.

The truth is that the current inflation rate in Nigeria is such that, no one can afford not to start saving for retirement as early as possible. Today as a millennial, you only have plus or minus thirty (30) years between you and retirement at the age of sixty-five (65). You might think that you still have a lot of time, but that is not the case.

For example, let us say that you currently earn eighty thousand Naira (N80,000) and you do not have a pension plan. With the current inflation rate being 12.26%, if you decide to start saving for retirement at the age of 35 you will need to earn a little over two million five hundred thousand Naira  (N2,500,000) per month in order to survive at the age of 65 and twenty times that sum if you live till the age of 85. You can check out the inflation calculator on nairametrics.com to do the math.

Given that your ability to earn diminishes as you grow older, you will need to have put enough money aside to be able to pay bills and other daily activities to sustain the same lifestyle, you were accustomed to throughout your retirement. This means that you will need to save at least eight hundred and eighty million Naira (N880,000,000) to keep you in the same lifestyle you enjoyed at the age of 35. There is however no need to panic as there is a solution to this.

Firstly, there are a lot of things you spend money on now that you will not have time for during your retirement. Experts say that people spend between 70-80% of what they used to earn during their retirement.

Now that I have told you why you need to save for retirement, let me share how you can save enough to be able to keep up with inflation.

1. Make sure that your employer is contributing to your Retirement Savings Account (RSA)

Nigeria currently runs a good pension scheme which was further strengthened in 2014 with the introduction of the Pension Reform Act (‘The Act’). The Act requires every organisation with fifteen (15) or more employees to contribute to an RSA on behalf of their employees for the purpose of paying retirement benefits. The contribution is made up of a minimum of ten percent (10%) of the employees basic, housing and transport allowance to be paid by the employer and eight percent (8%) of the employees basic, housing and transport to be paid by the employee. Organisations with less than 3 employees are also entitled to make contributions if they so wish. The pension scheme is set up in such a way that an employer pays the eighteen percent (18%) contribution to the RSA of the employee’s chosen Pension Fund Administrator. The Pension Fund Administrator thereafter invests the funds in government bonds, stock and various other instruments in accordance with the National Pension Commissions multi-fund structure policy.

2. Make voluntary contributions to your Retirement Savings Account 

Another way you can save for retirement, is to make voluntary contributions to your RSA. The pension scheme in Nigeria, also allows employees to make additional contributions to their RSA. You can take advantage of this opportunity by making contributions to it. Don’t be mistaken, the regular monthly pension contributions made by your employer will not be enough to keep you going during retirement. This is because, at the point of retiring the money in your RSA is not paid to you in full. It is paid gradually over a defined number of years or the period of your lifetime.

For example, if at the point of retirement what is in your RSA is twenty million Naira (N20,000,000) and it is expected that you would live another 30 years, the twenty million (N20,000,000) would be divided by the number of months you have left to live. i.e. N20,000,000 divided by 360 months which comes to N55,555 per month.

You can also withdraw a bulk sum for capital projects, but this would only be a fraction of what is in your RSA. The rest must be left to cater for you throughout your retirement period. It is therefore important to make additional contributions to ensure that you can maintain your current lifestyle at retirement.

3. Save any additional income

It is important that you save at least 20% of any extra income you receive outside your regular salary all throughout your working life. You can save it in a mutual fund that invests in fixed assets such as federal government bonds which offer yields above the inflation rate. This will give you very good returns overtime. Another great trick is to reinvest the interest earned in the mutual fund so that you can enjoy the benefits of compounding interest.

4. Invest in defensive stocks

The Nigerian stock market is a very good place to invest your money to protect it from inflation. A lot of people in Nigeria, however, do not like to invest in the stock market because of the risk and volatility involved. This is not always the case, especially when it comes to investing in very good defensive stocks that have stood the test of time. By defensive stocks I mean blue chip companies which have credible board members and have constantly remained profitable even during previous recessions. These types of stocks are usually the leading brands in their sector and continue to pay decent dividends to their shareholders even in times when the economy is said to be in crisis. The value of these stocks continue to increase over time and buying them will protect you from the woes of inflation.

5. Invest in dollar denominated funds

Buying Dollars and investing in Dollar denominated funds is also a very good way of protecting your funds from the effects of inflation. The value of the Naira is weak and because of this, it is vulnerable against its other foreign currencies. It has been devalued so many times that is almost always a good idea to keep the bulk of your savings in Dollars. You could also earn interest in dollars by investing it in dollar denominated mutual funds. There are quite a few, which offer very good returns. Some offer a minimum entry of as low as five hundred Dollars ($500) and subsequent subscriptions of one hundred Dollars ($100).

Lastly, always make sure you do an exhaustive due diligence investigation on anything you want to invest in. Do not invest in schemes that are not regulated by a statutory body such as the Central Bank of Nigeria, Securities Exchange Commission or the National Insurance Commission. This way you avoid getting involved in fraudulent investments which promise unbelievable returns.

It is very important that we start saving for our future now. I for one do not want to have to rely on my children to feed me, especially not in these times when children have become so independent. I fear that those good old days of “my children will take care of me when I am old” are dead and buried, so I definitely plan on taking care of myself and lending my children a hand when they need one. You should too!