Retirement lies waiting for all. It is a stage in life that can only be avoided by early death, which is not the option most people will go for.
You might have probably envisioned your dream retirement, relaxing on the patio of a beach house, taking trips across countries, sipping cocktails on a beach, among others. Like many, if not all people, you do not want to work until you die and most certainly would want to live and have a comfortable retirement.
To enjoy this retirement dream requires financial planning. But even with a financial plan, how do you ensure your pension is adequate? Yaw Korankye, a pension expert, in a webinar organised by Ghana Talk Business explained how.
What is Pension adequacy?
According to Yaw Korankye, Adequacy in this context means “how much you are consuming now, as against how much will be replaced in retirement”. This is determined by your needs such as food and shelter, your lifestyle which includes tastes and preferences, and the amount of income that is being replaced.
One key thing to note is, during retirement, a certain portion of your income is replaced. However, “how much of it, is the problem,” he added. Both the young and old need to ask themselves the relevant questions such as;
- How much of my income will be replaced when I retire?
- Will my retirement income be adequate for me?
These questions are relevant because, when the day of retirement sets in, you should be able to enjoy your retirement without financial stress. It must be a meaningful and fulfilling time.
Pension Adequacy – Bridging the Gap between your working income and retirement income
An important aspect to note is that income drops when we retire. That is, only a portion of your monthly earning is reallocated as retirement benefits. However, there are avenues to bridge the gap, which require time.
Time is of the essence when it comes to retirement, Yaw Korankye said. For instance, if you are 25 years or in your 30’s, you will have to set aside about 10% of your salary into your pension fund. And if you’re already in your 40’s, you will have to set aside between 30% – 40% of your income to make up for the time loss and be able to have an adequate pension.
The reason being that, the Social Security and National Insurance Trust (SSNIT) will need a minimum of 15 years of your contribution before you can qualify for a monthly pension, he further added.
Retirement Planning, Ghana – Sources of Income
SSNIT 1st Tier
This is a mandatory, defined benefit scheme for workers. 13.5% of your gross income is contributed by your employer on your behalf. 2.5% of this goes to National Health Insurance Levy (NHIL). This leaves a difference of 11% of your gross salary, which is contributed monthly towards your pension, he explained.
To fully comprehend this scheme, he further gave this analogy. Assuming an individual’s gross salary is GHC1,000.00 and the employer pays 13.5%, the individual will receive 37.5% of his salary (GHC1,000.00) which is GHC375.00 per month if he contributed for 180 months (equivalent to 15 years, SSNIT’s minimum requirement).
On the other hand, if he contributed for 360 months, the said individual will receive 54% of his salary (GHC1,000.00) which is GHC540.00 per month on retirement. Thus, the more you contribute, the more the percentage increases. This is known as Pension Right.
Analogy aside, it is worthy to note that, SSNIT uses the best 3 years of your earnings during your career life and strikes the average. This forms the basis on which SSNIT pays retirees.
Another point to note is, the scheme is capped at 60%. So, no matter how long you work and contributed to the scheme, it is still capped at 60% and this best explains why income drops when we retire.
Look out for the part 2 of this article, which will discuss the others sources of retirement income, as well as other means to ensure adequacy of income in retirement.
About Yaw K. Antwi
Yaw is a Pensions and Management Consultant with M-DoZ Consulting and an Executive Director of M-DoZ Retirement & Investment Club. M-DoZ runs retirement & investment planning sessions for companies, churches, trade associations, groups, e.t.c. The club runs financial advisory clinics and helps its members to plan for retirement. Joining the club is free. Call now on 0201196080 and book a retirement planning session for your staff/group. firstname.lastname@example.org; follow on Facebook and Twitter