How youth can save for retirement amid tough pension restrictions

When it comes to saving for retirement, most Ugandans fall short. According to a study from the United Nations University World Institute for Development Economics Research (UNU-WIDER), less than 10 per cent of workers in sub-Saharan Africa save for old age. This is the lowest rate in the world. We sourced Financial Analyst John Schmidt and Kat Tetrina for how the youth can start a saving culture for old age despite poor pension performance in the country.

How youth can save for retirement amid tough pension restrictions/Pixabay

According to the UNU-WIDER study, most of the current breadwinners won’t be able to afford basic items after retirement. The study indicates that only 19.8% of people above the statutory retirement age receive a pension in sub-Saharan Africa, and just 8.9% of the labour force is covered by pension schemes. These figures are staggeringly lower than the global average where 77.5% of people above statutory age and 53.7% of workers have pension coverage.

Pension schemes in sub-Saharan African countries are characterised by low contributions due to low earnings, high informality, high financial illiteracy levels and lack of proper information about the benefits of adequate contributions for future pension withdrawals.

South Africa, which is the continent's top performer, had pension fund assets valued at US$330.3 billion in 2019 (latest country update), in comparison to the United States (US$40.0 trillion) and the United Kingdom (US$3.8 trillion).

In comparison to economy size, the best performers were Namibia (95.4%), South Africa (82.6%) and Botswana (51.9%). Angola, Mozambique, Zambia, Nigeria and Ghana trailed with pension assets below 10% of their gross domestic product.

  1. The majority of the population is young and fertility rates are high. The annual population growth rate in sub-Sahara Africa was 2.5 per cent in 2022 which is three times bigger than the global annual average.
  2. The old-age dependency ratio (the number of elderly people for every economically active person) is low compared to other regions, averaging 5.5 in 2022, and the ageing population is small but increasing. 
  3. With much younger populations and relatively high population growth rates, the number of dependants in sub-Saharan African countries is increasing at a slightly faster rate, and over time the numbers of elderly people needing social support will also rise. 
  4. It is projected that the number of elderly persons in the region will grow at annual rates above 3% between 2022 and 2050.
  5. High levels of unemployment and the large informal sector size, which accounts for 89.2 per cent of the workforce, mean that the elderly will continue to face income challenges. 
  6. Households are also becoming smaller and changing from multi-generational (made up of grandparents, parents, children and grandchildren) which offer more social support to the elderly, to skipped-generation (where grandparents live with grandchildren in the absence of parents) or one-generation (where the elderly live by themselves).

The major concern is that only one in five people of pensionable age receives an old-age pension compared to over three in four people globally.

So how can the youth and those coming into old age save for their pension?

Here are nine steps to save for retirement

"If you have a better idea of what your annual expenses might be in retirement, you can create a more personalized goal for yourself using the 25x rule. Estimate your annual expenses in retirement and multiply that figure by 25. If you think your annual expenses will be $50,000, for example, the 25x rule suggests you’d need a total of $1.25 million saved to retire without having to worry about depleting your nest egg early," John and Kat mention.

"Historically, investments in the stock market have offered significantly better returns than savings accounts, making them the preferred tool for growing your retirement savings," they say, adding that, "Not all investment accounts are ideal for retirement savings."

"There are two main types of retirement accounts: employer-sponsored retirement accounts, like 401(k)s, and individual retirement accounts (IRAs). In general, both types of accounts are available in traditional and Roth varieties. Both offer tax-advantaged growth of your investment money, but you pick whether you’d prefer an income tax break now or in retirement," they say.

"You may not be able to immediately save 15% of your income for retirement—and that’s fine. You can start small to take advantage of the crucial role that time plays in compounding your investment returns," they say, adding, "To help you reach your retirement goals, many financial advisors recommend you increase the amount you contribute to your retirement accounts by 1% every year until you reach at least 15% of your salary."

If you get a bonus or raise, adjust your contributions right away to deposit the difference in your paycheck to your retirement fund.

If you get a tax refund or other unexpected windfall, use some or even all of the extra money to make a contribution to your IRA.

As you pay off student loans, car loans, or credit card debt, don’t redirect the amounts you were paying into spending. Keep making the same monthly payments—just direct them into your retirement accounts.

Lifestyle inflation or lifestyle creep is our tendency to spend more when we have more. Instead of upgrading to a larger home or purchasing a new car when you get a raise, try to make do with what you have to minimize your expenses and funnel your extra cash into your savings.

"Historically, the stock market has seen average returns of about 10%. The keyword in that sentence is average. There have been years when it has grown more than 20%. And then there are years when its performance has sunk deep into the red," they say.

They say, "When you’re investing for long-term goals like retirement, remember that after all periods of negative performance, the stock market has recovered its losses and kept moving higher. So don’t get too hung up on your retirement portfolio’s performance from day to day, or even from month to month or year to year."

Remember that retirement is a long game, so you need to take the long approach.

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