Saturday, June 6, 2009

Weekend Digest: How Often Do You Think About Your Retirement Plan

The notion that I am too young to think for retirement plan has no chance in the world we’re living today. Historical Tanzania doesn’t have a long history of a variety of financial vehicles mainly because the state was in charge of the economy and the private sector was largely absent. The post 1985 period witnessed a lot of economic reforms and liberalization which saw the private sector gain strength and become the main vehicle of development.

Unlike before, youths in Tanzania have access to a lot of financial vehicles that they can use or utilize retirement plan

Tanzania treats its labour force bracket as that belonging to the 15-64 ages category. However, for the sake of this article, I will focus on 24-50 years (because most individuals are matured or leave a more stable life at this age and beyond]. Why 50? Because beyond 60, your chances of making use of a variety of financial vehicles that I will address in this article are very slim or you won’t be able to guarantee efficiency, or minimize risks etc.

Investment planning for retirement should be an important element for every adult regardless his or her present financial situation. Planning for retirement is a comprehensive process for determining how much money you will need at the time of retirement.

Planning also helps you to identify the best ways of saving for retirement given your financial situation. A lot of people feel that retirement planning is important when you cross 40 years of age or you have to be employed in order to think about it. But nowadays you can’t afford to wait until forties; people should start thinking of retirement planning in their twenties and thirties. In this generation the increase of different retirement vehicles such as Umoja Trust Funds (UTF) have made these schemes more lucrative for investors.

A proper financial planning for retirement requires a long period of time, that is, from the day you start working until well beyond your actual retirement date. Money saved in the early part of the life has more time to grow than money saved during the late stage of life. Also young investors can look for investing in more risky instruments such as put all his/her money in common stock offered by companies such as NMB, TOL and many others. They have time on their side which provides an extra cushion to absorb the risks and hence lower the risk.

Planning is an important part when talking about savings for retirement. You need to project your future expenses based on the current expenses (for example living expenses, travel and leisure, medical and other routine annual expenses). Since it is a very long term plan, it may not be very accurate in the beginning; however as the time elapse you will be within the margin of error. Individuals should treat it as a flexible and dynamic plan which can be revised based on changes in projected goals and current earnings.

Individuals need to review their investment plan every now and then and if necessary, make changes to accommodate any additional needs. A good retirement plan requires your active monitoring and long-term commitment.

Once you have thought about an investment plan, your investment allocation would depend on the amount of money that you wish to save, the return you are looking at, your age, current income and your degree of uncertainty that you can handle in regards to a negative change in the value of your portfolio.

There are many different models used for selecting asset for your investment portfolio; however, the actual allocation could be different on a case by case basis depends on many factors.

Investors below 30 years: These investors have long way to go for retirement. They can afford to invest in higher risk assets such as common stock in order to get better returns (historical common stocks have high risk and high returns). This group can invest up seventy percent (70%) of their savings in the stock market and put the rest in safe instruments like fixed deposits offered by majority of the banks here in Tanzania or precious metals such as gold, diamond and etc. If it happens an individual in this group has enough money to invest on real estate then it’s wise to do so. Historical real estate produces a good return over the period of time.

Investors between 30 and 40 years: Investors in this age bracket can look for balancing their retirement portfolio by investing in real estate such as (frame za maduka au ofisi, houses etc) for rent. Also they can invest some of their retirement into stock market; however it shouldn’t be more than 50 percent. This is due to the fact that as the investor age elapse he/she need to reduce his/her exposure toward high risk assets such as common stocks. Other financial vehicles which can benefit this group is including fixed deposit account.

Investors in the 40 to 50 years age bracket: These investors should go for a more balanced approach towards risky and safe investment. They should reduce exposure in stock market to 30 percent or 40 percent of the total investment portfolio. They should look for investments in safer investments like property for rental, and other fixed income securities such as fixed deposit account.

Investors in above 50 years age bracket: These investors are very close to their retirement. They should gradually reduce their exposure in common stock instruments to less than 20 percent. Based on their needs they can look for investments that secure a regular monthly income.. Investment such as real estate, fixed deposit securities can be another option for this group.

The real secret here is to start investing early and investing regularly in life, whatever small the amount may be. Investing early gives time to your investment to grow by way of compounding and investing at regular time intervals make you ride multiple opportunities in the market.

Many people value stocks of former state owned enterprises based on their perception on how these SOEs performed in the past. It should be noted many of these, besides banks or insurance were not efficient in operations and were heavily subsidized.

There are few things that you should consider before purchasing any common stock :( a) Performance of the company, how does the company performed over the period of time. (b) Perception of demand for that product. For instance TCC and TBL many don’t consider competition in the future, regulations etc. (c) Management structure of the company.



GT said...

I think NSSF are doing a brilliant job. I would bet my pension with them. The best part of it is they allow voluntary contribution sasa what more can you ask for?

salama said...

Thanks for the interesting insight. Frankly speaking!, the 'retirement' notion is a little too scary especially when you surely, know that it's just about time to start thinking about it. I wish I could put it as a "savings plan"

Oh! well, we just have to aknowledge and embrace the truth I guess. The current world economy malaise, have opened the eyes of many and challenged us all especially when it comes to finances and our future. The best way is to dig the outline and shop around well for the best plan. (Good luck)!

salama said...

Thanks for the interesting insight. Frankly speaking!, the 'retirement' notion is a little too scary especially when you surely, know that it's just about time to start thinking about it. I wish I could put it as a "savings plan"

Oh! well, we just have to aknowledge and embrace the truth I guess. The current world economy malaise, have opened the eyes of many and challenged us all especially when it comes to finances and our future. The best way is to dig the outline and shop around well for the best plan. (Good luck)!

Anthony said...


This whole thing is the biggest scam of the 21th Century.
If I had to pick from pension plan and 401K, I would have gone with pension.

After I lost 30% of my money last year I panicked! I read a lot of investment options so I could go and move my money around, what I found was similar to what you wrote with a little twist. I will compare with the US here because your article fits the model - I could be wrong with the situation in Tanzania now.

Here is what I think, investing is a legal form of gambling. Only 50 million Americans are participating, some even contribute as less as 1% due to hardship and all the estimates indicate they will retire poor. Furthermore, this plan was intended to supplement pension plan not replace it. 'Legal corruption'(Lobbying) in US convinced the lawmakers this was better than pension. Now employers are not mandated to put money into pension anymore. Of course, the employer is the winner here as they don't have to contribute to every employee, seldom all employees participate. If they do, not all contribute the max and employers has to match as low as 3% of whatever less the employee contribute.

I think this was not intended to enrich you or I, it was a way for companies to get away with pension which was mandated to them. Consequently, pensions have crippled Detroit. So before we even try to imitate this in Tanzania we got to learn something here, will this western model work in Tanzania? Are there testimonials of beneficiaries?

To me this is like Yanga vs. Simba match, one has to gamble on how many matches one team will win against the other in the span of 30 years; Equivalently, Sumply vs. Demand, which will outweigh the other.

I call this retirement gambling.
Unfortunately I am not good at it, at least not yet.

In the end (when the money is gone), as with the football game, I will ultimately say, "Kufungwa twafungwa, lakini chenga twawala."

'Chenga' being the time to read, understanding, weighing your options (risks), fees, headaches, dissatisfaction,anticipation, and uncertainty.

Good luck!

Iddy said...

If you read my article I clarified that investing in stock market is not the only option that Tanzanian have, however it’s an opportunity for everybody in Tanzania today. The theme of this article was to reenergize the movement toward early retirement plan. It doesn’t matter you want to invest on real estate, common stock, corporate bonds, treasures bonds, diamond, or gold. You just need to find the way that fits your needs and channel your resources toward that direction as retirement plan.

I total understand your frustration toward stock markets and its uncertainty. However, you as an investor you’re supposed to know what you’re getting your self into. Let me tell you this on October 2007 when Citigroup dropped to $30, a lot of people were temped or convinced to move their nasty eggs into Citigroup. I was one of them, and this was based on the ideology that it will never get worse that this for Citigroup. We were wrong, Citigroup dropped to $26 in less than a week. I evaluated my options and took the loss and get out. Eventually any business has a loss and profit.

Investment in stock market depends on many things, and one of them is risk tolerance. If your aged and you don’t like to risk, then you can put your money on safe investments such as Municipal bonds (not in Tanzania yet) or government backed securities, build some property for rent.

What I disagree with you is the notion that “let the company prepare my retirement”. That is more than a gambling, because first the company doesn’t know your expenses and lifestyle. Who knows when these companies will get into a trouble; do you see what happened to GM and Chrysler? Now who will pick the tab after brutal bankruptcy?

You need to control your own retirement plan, because at the end of the day you’re the one who retired and not the company or the government. I challenge all youngsters out there to find the way to channel their retirement at early age. Because you can afford to lose some money when you younger, but not when your older. Take a big risk, and for those who are in the Western lands it’s time to buy, everything is on sale (bargaining price). Do your homework, get someone who knows finance. Ask some question and do your own research. I love to play golf when am 30 and I guess I will love to play when am 70, it cost to maintain country club membership. So you have to prepare future now. If the company set your passion fund, take it and never settle for that…. Prepare your own plan. Don’t wait for NSSF, or PPF or Teachers retirement plan to help you when you 62, because few money you saved today at these funds will not cover your expenses when you retired.

Anthony said...

I am glad that you understand my frustration and shared your Citigroup experience to prove my point. Your disagreement though, is not due to what I had suggested. My noting pension and how 401K came about was an attempt to show the scale of the scam. Yes, your employer has some responsibility into your retirement if you so choose to participate in 401K as they pick the mutual funds for you to invest in, you have the freedom to diversify. I know you can go around and pick your own IRAs and whatnot, at the end of the day you ARE gambling with your cash. (I do that too!)

Hypothesis! that's all to it.

NT said...

thanx bro for the superb and insipiring article,am in my 20's and was still weighting my options in investing,i suppose the idea of real estate should be great due to the fact that one day i will be bussiness mogul.cheers

Anonymous said...

What percentage of our people have access to the stock market or our financial institutions? I bet 5-6%.

I really like your article but ina fit kwenye Western World.



Anonymous said...

I wish I had time to write more but the best solution for retired group in Tanzania is Jikimu Regular Income Scheme offered by the Unit Trust of Tanzania,