Tuesday, March 5, 2013

RETIREMENT AND THE CHALLENGE OF BUILDING VALUE



In a previous time it was just enough to survive another day. This uncertainty meant there was little incentive to think long term as one never knew from day to day whether they would be around the next day. Living hand-to-mouth made sense.

The relative security of the last two decades means we have had to shift the way with think about money, wealth and financial legacy.

Stability tends to do that. It orders society. Allows the creation of wealth by a bigger pool not just by the eternal optimists or hardcore hustlers.

In addition the first generation that got employment after employment have gone into retirement, many with less than good results. Another generation, the one that has lived all its adult life in the NRM era hears the retirement knocking incessantly.

These pressures have triggered the construction boom of the last decade and provides fuel for any number businesses being set up by the day around the country. 

The challenge is one of building an asset base that can, on retirement, throw off enough income to sustain us through our evening years.

If you think about it if you are making one million a year, ideally you need an asset or assets throwing off a net income  equivalent to that every year to sustain your current lifestyle.

Using the benchmark 91-day treasury bill yield of about a ten percent you would need an income generating asset of at least sh10 million to keep you happy or at least as happy as you are now. Of course if your annual income is greater than one million the challenge is that much greater.

The say that time is money comes into sharp focus. The sooner you set upon the journey of building this asset the better the chance that you will retire with it in place. 

It’s unlikely that one can save enough money in their working life to guarantee a comfortable retirement, so inevitably the question of investment comes into play. 

Investment is about committing resources to an endeavor with a hope of future return. The key word is hope, because even with the best investments success is not guaranteed. So investment success needs to account for failures.

There has been a time old practice in office for a group to form around the idea that they each contribute a monthly sum to a common pool and every month one person takes the collections to meet every day needs or push personal projects.

A friend is involved in one and after months of operation is wondering why there seems to be no positive progress in his life or the group’s generally.

There are two ways to spend money either you consume it or you invest it. The reason my friend is seeing no progress because its likely that when individual members get their windfall they tend to eat the money rather than invest it.

However this “merry go round” arrangement comes from an important realization that collaboration is required, the execution is where it falls short. 

The members will be best served if they convert themselves into an investment club, which while continuing to save monthly will be much better able to invest meaningful sums at a go.

The critical thing with these groups is the reach of their vision. If the group has  a long term vision it will be better able to weather the inevitable speed bumps that come along, avoid the temptation to descend into an orgy of consumption when meaningful sums have been accumulated and hold the faith of delayed gratification.

The size of the vision will determine the eventual size of the enterprise.

A group I know that started operations eight years ago have been able to grow their investment fifty one fold or showing an average annual return of 63% after tax. They did this while doing nothing spectacular other than lending to themselves and investing surpluses in treasury bills and bonds.

The group which now has savings of about sh2.5b today has properly harnessed the power of compound interest, what Albert Einstein called “the eighth wonder of the world”.

It’s about creating value. During our schooling years we accumulated value in the way of information, which information we have been paid to employ in creating value for the companies we work for.

Learning how to invest and investing means capturing some of this value for ourselves and may be the most useful use to oneself of all the knowledge that has co me with our schooling and working experience.

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