Retirement Fund 101
Personal Finance,  Retirement,  Wealth Creation

Creating A Retirement Fund That Works.

Retirement is wonderful if you have two essentials; much to live on and much to live for – Unknown.

Unfortunately, many work for so long and end up with nothing much to live on upon retirement. To escape that trap is the reason for a retirement fund.  A retirement fund (otherwise referred to as a pension plan) is an account where you invest a portion of your income towards retirement when your earnings capacity is expected to reduce, and upon retirement, you earn from the retirment fund.

How does it work?

Generally, there are two forms of pension plans; Defined Benefit Scheme and Defined Contribution Scheme. In the former, the employer has an obligation to pay a defined sum of money upon retirement, regardless of the performance of the investments such monies are invested over the years. Meanwhile, the latter (which is more popular) involves the employer paying just a fixed percentage of your monthly income to your pension account, while the employee also contributes likewise. In Nigeria, the regulation mandates that every employer pays 10% of the employee’s salary, while the employee contributes 8%.

Perhaps you are self-employed, and you are reading this; I can guess the question that runs through your mind is establishing your pension fund. There comes in the Micro-pension plan targeted at the self-employed and the informal economy. In this instance, you voluntarily save into a dedicated account which is invested towards your retirement.

Pension funds are typically managed by licensed pension fund managers who invest the money on your behalf as the policyholder.

Getting Started

As an employed individual, not much is needed to get started. Your employer will typically assist in setting you up if you have no previous retirement account. There onwards, a monthly contribution is deducted from your monthly earnings.

As a self-employed,  write out all your income sources and estimate your monthly earnings. This helps in ascertaining how much your income you can allocate to your retirement account. How much you earn from your retirement savings depends on a few factors; key among includes your earning, your target amount, and how much is periodically saved. Later, how to estimate your retirement fund would be discussed. Having established your income and how much you wish to set aside for retirement periodically, approach any pension fund manager in Nigeria to set up a micro-pension account.

What is my Retirement Account Invested in?

Nigeria runs a multi-fund structure for pension fund management. In other words, your pension fund is invested in a particular fund category (see below), whereby each fund invests a different proportion of your contribution either in fixed-income security (e.g. bonds) and variable-income security (e.g.Stocks).

Fund Categories

  1. Fund I: For contributors that are 49 years and below (only accessible upon request). Invests maximum of 75% in variable-income securities
  2. Fund II: Default fund for all contributors that are 49 years and below. Invests maximum of 55% in variable-income securities
  3. Fund III: Default fund for all contributors that are 50 years and above. Invests maximum of 20% in variable-income securities
  4. Fund IV: Only for retirees. Invests maximum of 10% in variable-income securities
  5. Fund V: Only for micro-pension contributors (self-employed and those in the informal economy). Invests maximum of 5% in variable-income securities
  6. Fund VI: For those who wish to invest their pension in ethical and non-interest investments. Invests maximum of 55% in variable-income securities

Hitting a Fund Target

Chances are that you have probably wondered how much you could possibly have in your retirement fund by the time you retire. Your retirement fund balance will typically be subject to four factors; contributions, withdrawals, fees, and average return/interest rate.

How much you have contributed in the span of your active years is a primary determinant of what will be in stock for you at retirement. Hence, the higher your income or your frequency of saving (if you are self-employed), the more it is likely that you have a robust retirement balance. There is also the possibility that you remained out of job for some specified period, which necessitated withdrawal from your pension or halt in your contribution. Worthy of note is that there the pension managers charge also charge a fee (see here), which is deducted irrespective of what you earn or contribute in the fund. Importantly, what the interest rate environment is like in the years prior to your retirement or the quality of returns realised from investing your funds determines the size of your retirement fund.

However, what seems to be fully in your control is how much you contribute. Regardless, if you desire to hit a particular RSA target by retirement, this can be estimated by making some assumptions. Thereby, letting you know how much you have to contribute periodically. Alternatively, you could also determine an estimate of what you will be earning per month at retirement, based on your current contributions. While there are several pension calculators online, you may check here to simulate your figures.

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