In the personal consultations and workshops that I do on money management, I meet a lot of people who like the idea of keeping money safe. This is usually in the form of money they can actually see sitting in an account at the bank or money that is placed somewhere they can access immediately and the amount they put in is at very minimum what they get out. Investments professionals call this approach conservative or risk averse. Now after some experience in this, I have come to realise that this conservative nature comes from somewhere and is usually related to the financial experiences we had very early on.

For the purposes of this article we are focusing on why this particular approach is itself very risky. The reason is firstly Inflation. Inflation is defined as the general increase in prices of goods and services over time. The second is Retirement i.e. the point which you want to stop working for money (or have to stop working) and still maintain the same lifestyle you have been accustomed to. Putting these two concepts together, the cost of the lifestyle that you have now will continue to increase every year up to and into retirement. Yes, you may have paid off your mortgage, educated your children but you still need to eat, maintain your home, be able to see a doctor, put fuel in your car, pay for entertainment etc. Even if you choose to work you do not want at this point to have to depend on it.

Inflation on average has been increasing at rate of 10% over the last couple of years. Say your lifestyle costs Kes 100,000 per month today and you will be retiring in 20 years. The cost of your life then per month will be Kes 672,000 (for the same lifestyle of Kes 100,000 today). If you intend on continuing with the safe approach to investment i.e. having money somewhere it is safe and easily accessible (like a bank account) you would basically need Kes 1.3 billion to fund the remaining 30 years of your life. Remember inflation does not stop just because you have retired. Prices will still continue to rise even in these retirement years. With this approach and earning conservative type returns you will need to have been putting aside around Kes 3 million per month.

I think you will agree with me that this approach does not make sense and is not realistic. Your retirement is typically supposed to be funded by investing in vehicles that will ultimately produce the income that will be required to sustain your lifestyle. This way you are not eroding the value of the investment but rather living off the income that will be generated. Typically at the point you are retiring, you are also not taking that much risk so you can reasonably expect a 7%-10% return on income annually. This you will find in government bonds, property and dividends from companies. To sustain the same lifestyle identified above you will need to have accumulated an investment base of just over Kes 100 million in 20 years. Still aggressive but way more realistic than Kes 1.3 bn. There is also no point in trying to generate income from a small asset base. Trying to generate income from Kes 100,000 is a futile exercise. You have to grow the value of what you have so that ultimately you can convert it into a portfolio that will generate sufficient income. To do this you have to invest right now in the kind of vehicles that grow such as property and equity investments. Using the type of returns that these assets generate over the long term you will probably just need to invest between Kes 35,000 and 40,000 per month. Remember you can also make use of good debt (debt used for investment purposes e.g. mortgages) to help you get there faster.

Risk is measured by the possibility of loss or that the return from an investment will be different than expected. With the safe approach, your money might be safe. What you put in is what you get out. However what you get out with this approach is not what you need. With the more aggressive approach there may be mistakes you make along the way. You may sometimes even loose money but with each experience comes lessons that you learn to take you to the next level and ensure you have enough to live on. With a complete conservative approach you risk not being able to sustain your lifestyle as you know it. In my books, that’s the biggest risk you can take.

Waceke Nduati-Omanga


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