As you near retirement age or contemplate an early retirement, you are faced with significant decisions that bring various financial concerns to the forefront. You might find yourself wondering, “Will I be able to maintain the lifestyle I desire in retirement?” or “What amount can I comfortably spend each month?” These questions can understandably create a sense of uncertainty as you navigate this important transition. But the most pressing issue is: “Will I have enough money to last for the rest of my life?” Take Mr John Kato, for example, a 67-year-old. In 2012, he retired at 55, leaving his job in investment banking. A few years later, his wife joined him in early retirement.
Together, they had around Shs600 million in savings and retirement benefits. To secure their future, they invested their savings in a piggery farm, inspired by a friend who had embarked on a similar business.
This decision illustrates the common financial choices retirees face when trying to ensure long-term security.
The couple made an effort to secure their future by purchasing land and establishing a piggery farm. Unfortunately, the investment was short-lived as disease struck their animals, leading to a total loss of their stock.
Mr Daniel Babonereirwe, executive director of BANAR Consults Limited, a credit consultancy firm in Kampala, highlights that choosing not to invest is arguably the greatest financial risk one can take.
He notes that if savings are not invested, they will lose value over time due to inflation because successful investors are not made overnight.
It takes time to learn about investing, understand how the financial world works, and figure out your investing style. This learning process often involves trial and error, but it is essential if you want to avoid missing out on opportunities.
It is not necessarily a bad decision, according to Mr Babonereirwe. If someone invests all of their retirement benefits in a piggery and ends up with nothing; they just went about it incorrectly without adequate planning.
The key lesson, according to him, is to start small. By investing early and testing the waters, you can understand how things work before committing a large sum of money.
He emphasizes that when investing, you need to be mentally prepared and fully engaged with your decision.
Mr Babonereirwe also points out that people often have many competing needs but limited resources.
While your means are limited, your wants are endless. So, it is crucial to choose where to invest and the criteria you use to make those decisions to avoid complete loss.
He explains that his approach to making sound investment decisions involves ensuring that your choices meet essential criteria for managing your assets.
Viability of investment
Mr Babonereirwe also stresses the importance of shiftability and liquidity when investing. He explains that assets that are not easily shiftable—meaning they can’t be quickly turned into cash—are more rigid and could limit flexibility. To avoid this, it is crucial to distribute your assets in a way that balances both liquidity and long-term value.
Most importantly, he advises, one needs to have some nearly liquid assets. For example, if you only own a house and need money urgently, selling the house quickly would be difficult.
Liquidity is not about how profitable an asset is, but rather how easily it can be converted into cash when needed.
For instance, while land has traditionally been seen as a secure investment, not all land is easily profitable mostly because the success of any investment depends on the investor’s interests and the specific demographic factors that influence the value of their assets.
Age and investment
Regarding age, Mr Babonereirwe emphasizes that younger investors should focus on opportunities that actively engage them since they have both energy and time. “If I’m old and retired, I might have the time but not the energy to manage things,” he says.
If one buys land appreciating at a rate of 17 percent and another person has a bond appreciating at 18 percent, he would prefer the land.
He reasons that land can serve as a base for various business ventures, and it is one of the key factors of production.
“I will concentrate on my land and use it to grow more enterprises. While the other person earns from their bonds, I am not just counting the appreciation of my land; I am also considering its practical benefits. I can grow crops, graze animals, and potentially increase its value even further,” he explains, adding that a person’s age is crucial when starting an investment.
Young investors should seek clear ideas and practical opportunities. He points out that other forms of investment, such as bonds, are not necessarily productive on their own, as they require someone else to manage the actual work.
In his view, when discussing investments, we assume a hands-off approach.
However, if you participate in your investments, it becomes more akin to self-employment or a business venture.
Compounding investment
Albert Einstein, one of the world’s most reputable physicists once called compound interest the eighth wonder of the world. Why? The power it has in accumulating cash.
“Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it,” many economists’ books quote him.
This phrase underscores the powerful effect of compound interest over time, illustrating how investments can grow exponentially when interest is calculated on both the initial principal and the accumulated interest from previous periods.
Mr Babonereirwe explains the concept of compounding investment using a mathematical analogy.
He compares it to four mathematical operations: division and subtraction on one side, and multiplication and addition on the other.
He points out that those who understand compounding effectively use the multiplication aspect, which allows for a “multiplier effect.”
This is different from simply waiting for an asset to appreciate linearly, which requires waiting until the asset matures to reinvest any interest earned.
He notes that compounding allows investments to grow at a much faster rate as soon as possible. For example, if you lend money at a rate of 15 percent per month, that money would double within six months.
However, if you are compounding it, it could double in about four months.
This, he advises, should be what most people leverage on before choosing different investment strategies based on their age. For instance, starting a new farm at 80 years old can be risky.
However, if someone has already been involved in farming, they may be able to invest more confidently.
Mr Babonereirwe emphasizes that at 80, a person should focus on generating passive income. It is essential to understand the purpose of your investments: Do you need passive income, or earned income, or are you looking to run a business?
Typically, the most profitable investments come with higher risks, so choose options where you feel comfortable.
Your children should grow in your investment
According to Mr Babonereirwe, parents should begin teaching their children about money management as soon as possible.
He argues that this early education helps families understand where money comes from and instills the importance of saving.
By the time children reach 18, they should be prepared to make serious investments and sustain family investments.