Financial planning is central to most of the activities of the average Ghanaian. This is evident in most of the behaviors and decisions that Ghanaians make in their activities of daily living. The reasoning is that people file financial plans that they believe will meet their needs when they need some help. This concept or reasoning has given rise to various forms of hedging activities including short and long term investment packages and insurance policies.
In Ghana, one such common package is the retirement investment plan package, a common package usually referred to as “Pension plan’ administered by the Social Security and National Insurance Trust (SSNIT). This package basically provides for the needs of Ghanaians in their retirement periods when they are unable to engage in active public or private service. In addition, for people who can no longer work due to illness or permanent illness, the Scheme also pays such a disability pension regardless of their age and with very minimal contributions. Despite these benefits the scheme presents to Ghanaians, patronage has been at an all-time low, with the latest record indicating that just over 1.6 million people representing around 11% of the country’s workers are actively contributing. Of this number, just over 14,000 self-employed people contribute to the SSNIT pension plan. This low coverage is attributed to the nature of the country’s economy, where most people are engaged in their own business and do not see the need to enroll in a structured social security scheme. Industry analysts claim that if drastic measures are not taken and implemented to ensure that these workers benefit from a formalized social security scheme, it will lead to an increase in poverty among the elderly in the near future.
This highlights the recent public debate on retirement planning. Retirement planning determines short-term income goals and the actions and decisions needed to achieve those goals.
Understanding retirement planning
Planning for retirement is a lifelong process and requires a great deal of commitment and discipline. It’s the best way to ensure a safe, secure and fulfilling retirement. You can start anytime, but it works best if you factor this into your financial planning early on, which will be explained as you read.
Retirement planning here will be the planning one does to prepare for life after the end of paid work, usually capped at age 60 in Ghana. This involves weighing your fixed income against the cost of living, spending wisely, and saving significantly where extra income comes in.
If you’re a young man or woman or still building your career, retirement may not be a priority at this point in your life, but it will be one day. To ensure you have a financially secure retirement, it’s a good idea to create a plan early in life or now if you haven’t already. By diverting a portion of your salary or wages into a retirement savings plan, your wealth can grow exponentially to help you have a fun and fulfilling time in retirement. The focus on retirement planning changes throughout the different stages of life. Below is a general guideline for successful retirement planning at different stages of a Ghanaian.
Juvenile age (25 to 35 years old)
In Ghana, most individuals after school find themselves in active employment or self-employment between the ages of 25 and 35. This group of people may not have a lot of money to invest, but they have the most powerful weapon when it comes to investing. –TIME! They have time to let investments mature, which is an essential and valuable part of retirement savings. This is because of the principle of compound interest. The most “magical” and “powerful” investment concept is compound interest. It takes time and patience. Compound interest makes your money work and grows as it feeds on itself. With compound interest, a pesewa today is a fortune tomorrow.
Compound interest allows interest to earn interest, and the more time you have, the more interest you will earn. Even if you can only save 50 GHC per month, it will be worth three times more if you invest it at age 25 than if you wait to start investing until age 45. You may be able to invest more money in the future, but you can never make up for lost time.
Early 40s (36-50)
These groups of people tend to face several financial constraints. Within this group are people who have started a family life that comes with financial responsibilities such as child care, mortgages and personal loans (credit and debit cards). Others may still be repaying student loans and paying insurance premiums on their accounts. Nevertheless, it is very necessary to continue saving at this stage of retirement planning. The combination of earning more money and the time you have to invest and earn interest makes these years one of the best for aggressive saving.
People at this stage of retirement planning should continue to take advantage of any defined contribution plan (tier 2 and tier 3 or provident fund).
Late 40s (50-65)
Within this group, most personal loans, mortgages, credit and debit cards have been paid off. Those who had children at a very young age are also likely to shave fewer dependents, as their children are likely to be active in employment, leaving them with more disposable income. However, more disposable income does not mean investing aggressively. Investment accounts at this age should become more conservative or relaxed.
At this point, a number of people are likely to have high incomes. For those high-income earners, there may be those who started their retirement plans late and may decide to contribute additional funds to make up for lost time. It’s likely to be a shadow hunt if the goal is to match one that started at a young age, because the powerful effect of the composition has already taken place, which makes pairing nearly impossible (hence the advice to start early, no matter how small).
It is at this stage that you begin to have a real idea of what your retirement benefits will be. Anyone, including those without formal education, can benefit from any retirement plan as long as they have the right attitude towards saving.
In Ghana, the two most common pension schemes are the Defined contribution plans and the Traditional pension plan (generally categorized under SSNIT or referred to as level 1). We will talk about it in part 2 of this article.