Tips on Personal Financial Planning

A considerable number of us do not plan for life in retirement. Unfortunately, our future financial security is not determined by how much we are making now, but how much we can keep and for how long. Corporate and government pension schemes have proved to be unreliable. In Britain, they talk about Self-Invested Personal Pension (SIPP) while the Americans call it Independent Retirement Account (IRA). No matter the nomenclature, you have to make an alternative provision for yourself.

It is estimated that we will need about 60% to 70% of our current income after our active years are over. We can estimate the amount we will need at old age. First, estimate how long you will live for after retirement (say 30 years); then multiply by 60% of your current income (say, 60% of NGN1.2m per annum= NGN720, 000). Thus, you will need NGN21.6m during your old age (30x NGN720, 000). Divide NGN21.6m by the number of years to retirement (how long you still need to work), say 25 years, you need to save NGN864, 000 annually (NGN72, 000 monthly). Using the power of compounding to your advantage, you do not need to save NGN72, 000 monthly for retirement. Assume you invest at 10% interest for annum, you need to save a total of NGN1, 993,594 now (NGN21.6m= P (1.1)²⁵)! You could save what you need to secure your future in less than 5 years.

The following are guides on securing your future:

1. Reduce your liabilities: Liabilities are things that drain your financial resources, e.g. car loan, mortgage and so on. Reducing them will help increase your savings which can be used for investment purposes. Wise people save first and spend the remainder, not spend first and save the remainder.

2. Stocks Investing: Stocks offer a much higher return but is risky if you are not financially informed. However, when you do your homework, you could profit from the ignorance of other market participants.

3.  Real Estate: This investment vehicle is safer than stocks but has a lower return. A great obstacle is the huge capital requirement which makes it available to only those with enough capital.

4. Treasury Bills and Government Bonds: These are government securities that are completely risk-free. However, their returns are very low.

5. Insurance: It is a good investment. One could become an annuitant receiving a fixed payment for a specified period or for life after retirement. However, a lot of us in this part of the world have yet to embrace it.

6. Emergency Fund: Keep fund for exigencies. It could be in a bank savings or any other liquid asset.