Next month, Kenyan workers will dig deep into their pockets after Court of Appeal judgment allowed the government to implement the National Social Security Fund (NSSF) Act of 2013, which allows the increase of pensions deductions from Sh200 to Sh600 for the lowest paid employee, and Sh1,080 for big earners.
Previously, there was a low monetary ceiling on contributions thus the level of benefits after one’s retirement remained inadequate for most workers. For example, the lump sum that workers who were able to pay Sh400 per month for 35 years are assured of about Sh1.4 million.
Despite the amount being little in the long run, there are also chances of one blowing away the cash in a blink of an eye. What will happen to workers who fall behind because they are unable to afford the new rates? Will the government cushion workers whose payslips are lean?
In Singapore, contributing to a retirement fund is mandatory for all – employed citizens and their employers are required to make monthly contributions to the Central Provident Fund (CFP). With contributions starting when one begins work, the citizens have huge benefits at the time they retire, which is set at the age of 62.
Retirement may not always come naturally out of old age. Sickness, or a life threatening accident can force one into retirement at any point in time. In addition, one should strive to retire as soon as possible. In other words, it is important to look forward to a day when you will not need to work to sustain your lifestyle. That is the ultimate goal of financial security.
With the high rate of unemployment in the country, the savings rate will be low. Also, not all workers will be able to pay higher monthly pension contributions. This is where passive income comes in.
Passive income is any extra cash you earn without being engaged in an income generating activity. Examples include dividends, interest, royalties, rental income. Active expenses are those you cannot do without to live comfortably. These are food, rent, healthcare, school fees, clothes, personal care, airtime, and even internet.
True financial security can only be realized when ones’ passive income is consistently and sustainably above his/her active expenses. You better start saving for retirement the moment you earn your first shilling.
Retirement shouldn’t be thought about as something that will come in the distant future, but should be viewed as something that can happen at any point in a person’s life. If the mandatory new NSSF rates will destabilize some employees and employers, creating passive income is one potential way out.
