My name is Eugene. My father will retire in December this year and move upcountry. He will get a lump sum pension of about Sh2.5 million. We’re wondering how he can invest the money for a better stay in the village. During his working life, he has built a few rented houses that generate some income. He also does some farming. We have only one sibling in school, he is in class two. My father wants to buy a tractor for farming. He is also thinking of getting a power saw or investing in dairy farming with the money he will get from the lump sum. What is the best way to use this money so that he does not misuse it, get frustrated or go broke?
Benjamin Cheruiyot, the Engagement Lead at Abojani Investments, a personal finance and investment advisory firm, says:
If your mum or dad has never been in business, they shouldn’t start in retirement, especially with a pension.
At 60, their energy levels will be down, and they will be frustrated chasing debtors left and right.
Retirees should join a members’ club to socialise with other senior citizens and do some small farming projects to keep them busy. Monthly pension payments will cover small bills and meet social needs.
It is advisable to carve out a niche years before retirement. Using networks at work can help you set up a thriving business while still on the payroll.
Therefore, planning to start a business in retirement depends on your knowledge, skills and experience.
Cases of retirees losing their retirement savings to ‘quick-fix’ schemes are common. Others get caught up in the lure of rentals and spend all their lump sums on projects without detailed construction cost plans. The result is unfinished structures.
Your father has experience in letting out properties. He could improve the units for an even higher income or add some bed-sitters.
Depending on the location, Sh1 million could put up three to four units, each of which could potentially yield Sh10,000 per month.
Agribusiness requires proper market research to avoid getting stuck with produce. If done well, there are endless opportunities for wealth creation.
Adding unlimited value to farm produce will also give him a ready market to satisfy. His skill and passion, even in the low season, will determine the extent of his success.
The purchase of a tractor depends on whether he intends to use it on the farm or for business. It could be used for ploughing, planting, transporting building blocks or sand, or even selling water. Help him study the market to make better decisions.
In retirement, the bills hardly change when the salary stops, but the monthly pension is not the same as the last salary. Your father will need to reduce his lifestyle as inflation will always erode his purchasing power.
The first thing to do is to maintain comprehensive medical insurance. As he gets older, his body’s immunity decreases, especially if he has underlying health problems.
Moving to the countryside, where he will grow his own food, will drastically reduce the cost of living, as will a healthy diet. Carrying job titles into retirement is detrimental.
There are many cases of retirees who want to keep enjoying privileges that were employer-funded. He may no longer be able to afford frequent travel, as fuel costs continue to rise.
Expensive meals out will also be a drain on his finances. If possible, he should limit the outsourcing of services he can do himself. Secondary school fees for his last born child will be around Sh120,000 and there is also college fees.
With a lump sum of Sh2.5 million, he is looking at 30 years or more to live off the interest generated. Will this amount last that long? Assuming a monthly budget of Sh30,000 and no cash-flowing investment, this amount will only cover seven years of living expenses.
With inflation, this could be even less. He needs to invest this amount to earn more interest, which will keep him going longer.
Investing in a safe but meaningful return vehicle such as government bonds will give him a regular income.
If Sh2.5 million is invested in a government bond yielding at least 16 per cent per annum, it will earn Sh200,000 every six months. This works out at an average of Sh33,333 per month.
Added to your monthly pension, this could be enough to live on. Other options such as money market funds will earn him about Sh27,000 a month after tax in a fund returning 15 per cent a year.
Remember, there are infrastructure bonds on the market that pay tax-free interest of almost 18 per cent.
However, his options are limited by the amount and this hurdle can be overcome if he has savings stashed away that can be topped up for investments, especially in infrastructure bonds.
Take the time to understand the financial markets, especially treasury bonds, as they are relatively safe and offer better interest rates.
If he chooses one of the agricultural ventures or adds bed-sitters, Sh1 million capital might suffice.
The balance of Sh1.5 million could be invested in a money market fund for Sh16,000 per month or a treasury bond for Sh120,000 every six months.
If you have any money problems, email us at [email protected] and leave your contact number. Money questions will be answered on this column.
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