Pension, investment or both?

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As retirement impends
Kwadwo Acheampong

Jerry the mouse went out to look for food for himself and his family. Life was tough. In the good old days, it was easy to come by morsels of food in the kitchen larder. One was spoilt for choice. Just like a child in a toffee shop- just too many choices. It was only a matter of selection. It was tough then but the good ‘tough’ because, sometimes, it was not easy to take time to select what was best, before the great enemy, Tom the cat, came by. When it did, of course there was just one choice- RUN!

Now, it was as if almighty COVID-19 had affected Jerry’s sense of smell. Dry! There was nothing to smell. The humans were having a hard time and the hardship had trickled down. Even the mice were losing weight. Tom had been given out because it cost too much to feed. He could only hope and pray that Tom had ended up as a condiment and not a pet, no hard feelings. Meanwhile, life expectancy for Jerry’s family had shot up but it was threatened by poor nutrition.

Tough times. It was not getting any better and relocation seemed the only answer. Life was not working out in this home which was slowly becoming akin to a church- no food. A new home had to be found to relive the good life Jerry had tasted before. This was a move to save the destiny of his family.

Life was indeed difficult in this home. Household income was low, markedly lower than the year before and a year before then. It had not always been like that. Income had been high just a few years ago but had been cut sharply. The sole bread-winner had retired and started the life of a pensioner so income had reduced. The lump-sums received from his Tiers 2 and 3 were not very big and were used to defray a few debts that had accumulated over the years.

Now, it was the monthly pension payments they depended on. The pension right for twenty-five years of contribution was almost fifty percent. The pension right was a percentage reflective of the number of years one had contributed to the scheme. It began from 37.5% (2.5% times 15 years) and went up to 60%. Therefore, roughly fifty percent of the average of the best 36 months of salary was paid monthly.

Different Streams

A few tips could have made the difference. Firstly, it is wise to take on debt cautiously. We all borrow. However, we must borrow to generate wealth, not just to spend. It is a good thing to be sure that the borrowed money can be used to generate enough money to pay back and still have extra money made after. Otherwise, debt would just be a rabbit hole. Secondly, avoid expense traps. These are expenses that we commit to and which can restrict money that could have otherwise been used for productive ventures. Once we sign up, it becomes difficult to stop paying because it may be a contractual obligation or it may have moral implications.

Another extremely important exercise to do is to have different income streams. Just as it is important not to put all our eggs in one basket, so is it to diversify sources of your income. There are many avenues to engage in fruitfully without breaking out backs nor falling foul of the law. Many employees close from work and become rideshare drivers for the rest of the evening.

Some get involved in farming and are active farmers- animal husbandry, crops, backyard gardening- during the weekend. Currently, opportunities for investing in farming through crowd-funding are growing, offering avenues for investing for those who may not have the resources to farm directly. There are doctors in Accra who are musicians; when they are not examining patients they are in the studios. And there are investment professionals who run laundries when they are not introducing products and services to prospective clients.

Some IT professionals produce bottled ready-to-drink fruit juices right at home. There are yet many others who offer tuition to pupils and students who need to catch up with their peers. A number of these have low barriers to entry and should be easy to start, offering good opportunities to make considerable contributions to our income without huge amounts of capital expense.

Extra Income to Extra Pension

The extra income these ventures provide can be used to afford a worthy life of pension. We can add to our contributions and ensure there are no breaks if we ever find ourselves between jobs but unemployed. More months of contribution and larger contributions result in worthwhile monthly pension payments. However, is it just about pensions? Would pension payments be enough to ensure we enjoy or life after retirement? Our expenses may not necessarily reduce proportionally as our incomes. What about investing? Would it help bridge the gap between income and expenses? What about both. I mean having an investment with a pension scheme membership?

Pension is like life insurance which would pay an amount to us after a threshold number of years. It ensures that while we are alive, we have a regular income till we pass on. Its importance can, therefore, not be underestimated. Everyone must have a pension to provide a social security net during the time when we don’t any more earn something to cater for our needs. However, pension alone may be inadequate for the teeming majority of us. Pension payments are only a fraction of our salaries. To maintain our lifestyles, we would therefore require a bit more, from some form of investment we have made. It helps, therefore, to consider stretching to include investments with our pensions. 

The First Consideration

What kind of investment is necessary? Again, it depends on a number of factors: age of investor, disposable income, degree of risk aversion. However, the first consideration should be the steadiness of our earnings. If our earnings are volatile and if there are periods when we struggle to make ends meet, then our investments should be restricted to near-cash, highly liquid ones, to begin with.

The investments should be turned into cash in a very short time. Invariably, such investments return very little but still serve a very important purpose of providing cash in a short time of recall. With time, we may be able to build our investment and gradually drift to introduce a measure of risk to potentially gain higher return.

Investments, therefore, can be a vital addition to our pensions. Additional earnings from ‘side hustle’ can enable us invest, after basic and essential expenses are taken care off. Then, after retirement, we may still be able to maintain decent lifestyles. Jerry can feel secure about feeding but Tom would become a condiment and would continue to pose a clear and present danger.

About the Author               

Through his writings Kwadwo has discovered his love and knack to simplify complex theories spicing them with everyday life experiences for the benefit of all. The Head of OctaneDC Research, Kwadwo Acheampong, has over a decade experience in fund management and administration, portfolio management, management consulting, operations management and process improvement. Feel free to send him your feedback on his article. Email:  [email protected]

Cell: +233244563530

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