Investing for retirement: What you should do and what to avoid

By , K24 Digital
On Wed, 23 Feb, 2022 11:30 | 6 mins read
Representational image. PHOTO/COURTESY

Retirement is a phase we all will pass through hence the need to get there prepared. In Kenya, the retirement benefits industry is regulated by the Retirement Benefits Authority (RBA).

Investing for retirement is different from trading because, unlike traders who reap immediate rewards from buying and selling securities, a person investing for retirement will start realizing his gains during retirement.

According to a study, 85% of the current workforce in Kenya risk facing poverty upon retirement. This makes it imperative to have a clear investment objective.

Building a portfolio that has a blend of risks where the assets complement each other and lower the volatility for the return on investment is important. In this topic, we discuss some tips on how to build such a retirement portfolio.

#1 Start Investing early

According to data by World Bank, about 39% of Kenyans are below age 14. Entrenching a culture & education of investing from a young age is desirable.

If you are planning towards early retirement you need to start investing early. This does not only give your investments enough time to grow but also allows you enough time to learn and recover from any losses you may encounter on your investment journey.

Starting early also allows you to benefit from Compound interest. When compound interest kicks in, you begin to earn interest on interest.

The table below shows the effect of compound interest on an investment of Kes. 10,000 at a 5% interest rate.

Investment year Principal (KSh) Interest rate % Interest earned (KSh)
Year 1 10,000 5 500
Year 2 10,500 5 525
Year 3 11,025 5 551.25

As seen from the table above, the interest earned is added to the principal (i.e.500 +10,000 = 10,500) each year hence the next year’s interest earned is higher than the previous year’s interest rate.

Compound interest works more when you start investing early and there’s enough time for the interest to accumulate.

#2 Understand Safe and Risky Assets

When putting together an investment portfolio for retirement you need to understand your risk profile. The higher the risk the higher the reward. You need to have a combination of risky and safe assets in your portfolio. The allocation of the risky and safe assets will depend on your risk capacity.

Low-Risk Assets

Safe assets have a lower risk but also offer a low return on investment. They include

  • Savings account
  • Fixed Term deposits
  • Treasury bills
  • Treasury bonds
  • Cash

We shall discuss them in detail below.

(i) Savings /IRA Account

A savings account is meant to encourage saving and interest is paid on funds saved. The interest earned may be taxable. Interest earned on savings for commercial Banks in Kenya is as high as 4.5% p.a. Some banks offer higher interest rates, but the deposits required are very high.

For example, Standard Chartered Bank offers 4.25% p.a. interest rates on deposits of KES 50,000,000 and above. Normally for a low amount the interest rates are very low at 1-2% p.a.

(ii) Fixed Term Deposits

This is money you deposit with a commercial bank for a specified term. The term could be between one month and 12 months depending on the Bank.

Interest is paid to you at the end of the term. Access to the funds is not allowed during the fixed period but if you insist on liquidating before contract expiry, you will forfeit any accrued interest.

The typical Interest rate on fixed-term deposits in Kenya is around 4-6% p.a. depending on the bank & your term.

(iii) Treasury Bills (alias T-Bills)

Treasury bills are secure short-term investments issued by the Central Bank. They are secure because they are issued by the Government itself. In Kenya, they have a maturity period of 91 days, 182 days, and 364 days and are auctioned on a weekly basis.

The minimum investment for investing in T-Bills is Kshs. 100,000.

The interest rate is between 7.25% (91 days) to 9.724% (364 days). The longer the maturity period, the higher the interest rate.

Upon maturity, the full face value of the T-Bills is refunded to the investor.

(iv) Treasury Bonds

These are debt instruments issued by the Government. When you buy Treasury Bonds, you are lending money to the Government and will be compensated with interest payment.

Treasury bonds are very secure as they have the good faith of the Government. In Kenya, interest payment to Bond subscribers is made every six months. The return on investment is regular.

Treasury bond auctions take place monthly. This allows investors and salary earners to budget a portion of their monthly income to buy the bonds.

Kenya’s Central Bank offers a variety of bonds like infrastructure bonds etc.

Interest rates are fixed upfront and the bond yield can vary between 9% for 1-year bonds to 14% for 30-year bonds. If you invest in a 30-year bond, you would be earning interest every six months for the period.

Upon maturity, the full face value is refunded to the bondholder.

(v) Cash

Keeping physical cash may not be advisable because with an inflation rate of 5.4% in Kenya the cash will lose its purchasing power by the time you retire.

However, you must always have some cash reserved in the bank in case of an emergency. Saving could also be done in a foreign currency account at your commercial Bank to hedge against currency risk.

High-Risk Assets

Equity and its related assets are generally viewed as risky. This is because the prices of stocks rise and fall in the market. Though risky, the return on investment can be higher than with safer assets.

Let us discuss some risky assets.

(i) Stocks (aka Equity, shares)

The Capital Markets Authority (CMA) regulates the activities of the capital market in Kenya and issues licenses to all Stockbrokers.

In order to buy stock, you need to pass through a licensed broker. When you buy a stock you own part of the company.

Unlike traders who buy stocks, wait for their value to appreciate, then sell for profit, investors buy and wait for dividend payment periodically. The idea is to live off the dividends in retirement.

Shares are categorized into Ordinary shares, Preference shares, Non-voting shares, and Redeemable shares

Share category Features
Preference Holders are paid dividends first, in the event of insolvency of the company they are compensated first, they can also vote in meetings.
Ordinary Holders are entitled to dividend payments they can vote in meetings.
Non-voting Holders are entitled to dividends but cannot vote in meetings.
Redeemable These shares can be bought back by the company the holders cannot vote.

(ii) Mutual Funds

Mutual funds bring different investors together, pool their resources together, and invest in diverse asset classes. They are generally called collective investment schemes.

They charge yearly fees of about 0.5% to 1.25% of your investment. The fees are called expense ratios to make up for the cost of marketing the product and other administrative costs.

Mutual funds are not sold on the exchange so you will not see them on the price list of the Nairobi Stock Exchange. They can be bought directly from the fund managers or through your broker. (Brokers are also referred to as “trading participants” on the NSE website and App)

Investors in Kenya should check the Capital Markets Authority website for a list of authorized licensees from who they can buy mutual funds.

(iii) Exchange Traded funds ETFs

ETFs are the exchange-traded version of mutual funds. ETFs are a basket of different securities that trade like stocks on the Exchange floor. This implies that the prices fluctuate based on demand and supply. This is a major difference between ETFs and mutual funds. Some advantages of ETFs include:

  • Diversification
  • Cheaper than mutual funds
  • Tax benefits

For example, Investors in Kenya can buy into the Barclays NewGold ETF that tracks the price of Gold, on the Nairobi Securities Exchange.

(Key take away: Neither ETFs nor mutual funds are less risky. What determines their risk is the kind of assets the mutual fund invests in.)

(iv) Index Funds

Index funds are the type of funds that track a particular benchmark index.

In Kenya, the NSE20 is the index that tracks the top 20 companies in Kenya and has a yearly return on investment of about 10%.

You can invest in an index fund directly that offers NSE20 or create a portfolio of investments that replicates the weightage of an index. You can also buy an ETF or fund that replicates the Index.

(v) Trading Forex & CFDs

Forex trading involves trading currencies & CFDs on various instruments. There are six licensed non-dealing online forex trading brokers in Kenya for retail traders that offer forex & CFD trading on various instruments.

But Forex & CFD trading involves the use of margin & you can trade using leverage. This is very risky & it is only suited for professionals.

The general public should not indulge in day trading in the forex market as you could lose all your capital. Also, you should avoid


If you are nearing retirement you don’t want to take on too much risk as there is less time to recover from losses. People near retirement age could allocate 60% of their portfolio to safer assets like putting their money in Savings or Fixed Deposit accounts and 40% in some risky assets like stocks and mutual funds.

Care should be taken while picking stocks to invest in companies that can withstand inflation and pass the cost to their customers.

Younger investors who are far away from retirement age could allocate 60% of their portfolio to risky assets like Stocks, ETFs, Mutual funds, and the remaining 40% to safer assets like Fixed Deposit accounts and Treasury bonds.