Retirement Planning for MSME Owners and Freelancers in Nigeria

Retirement Planning for MSME Owners and Freelancers in Nigeria

Retirement Planning for MSME Owners and Freelancers

Retirement is a big deal—it’s a period of your life when you switch from living off your work income to using your savings, pensions, or other investments to support yourself. My strict opinion is, to take retirement planning very seriously.

Unfortunately, a lot of self-employed people like freelancers and business owners tend to put off planning for retirement. Unlike people with salaries who often have retirement plans set up by their employers, those in Micro, Small & Medium Enterprises and freelancers have to figure out their retirement plans themselves.

Tope Adaramola, the Chief Executive Officer of the Nigerian Council of Registered Insurance Brokers, reminded us that retirement is something everyone faces, not just salary earners. 

He shared, “We must take note that everyone must retire, and the notion that retirement is for those we call salary earners should be debunked. Everyone should make space to retire someday when they cease their daily work routine. Ostensibly when they cease, they will only live on what they had planned for when they were in active work, whether as a salary earner or non-salary earner such as an entrepreneur.”

To be financially stable in retirement, start planning early. If you don’t, it’ll be tough to save enough, and you might struggle later on. If you’re reading this, you’re in luck. This article will highlight everything you need to know about retirement planning as a business owner, or freelancer. 

Why Should You Plan for Retirement Early?

Do you know if you start saving N100,000 per month for the next 20 years with an average expected return of 10 per cent, after 20 years, you will have about N76m if you are consistent? Your total investment amount will be N24m, and the interest earned will be about N52m. Now imagine you do it for N150,000, N200,000, N250,000, and more.

The above is the power of compound interest. Compound interest is a key reason why starting to save for retirement early is so beneficial. It’s like planting a tree: the earlier you plant it, the more time it has to grow and bear fruit. Each year you invest early not only adds to your savings but also allows your money to earn more money through compounding.

The power of compounding becomes even more evident the longer you invest. Starting early means you can take advantage of this compounding effect for a longer period, ultimately leading to a much larger retirement fund. Plus, starting early can reduce the amount you need to save each month to reach your retirement goal, making it more manageable.

In essence, compound interest rewards patience and consistency. The earlier you start saving, the more you stand to benefit in the long run, giving you the freedom to retire on your terms. If you’re in your 20s and 30s, now is the time to start planning for retirement, you’re not too young.

Challenges That May Hinder Ability to Plan for Retirement

Now that we understand the importance of planning for retirement, let’s consider some challenges that business owners and freelancers face, which might prevent them from starting their retirement planning early.

Unpredictable cash flow

Self-employed individuals in Nigeria often deal with irregular income. Unlike employees with fixed salaries, their earnings can fluctuate, making it hard to contribute consistently to retirement savings. To manage this, they need to prioritize disciplined budgeting and financial planning.

Lack of awareness about retirement planning options

Many self-employed individuals in Nigeria are not aware of the available retirement planning tools and the importance of starting early. Educating themselves about these options is essential. They can seek advice from financial advisors or attend workshops and seminars focused on retirement planning for the self-employed.

Limited access to pension schemes

Self-employed individuals in Nigeria often lack access to the Contributory Pension Scheme (CPS), which is available to formal sector workers. Without the structured savings and investment opportunities of the CPS, they must seek alternative retirement planning options. This could include opening an Individual Retirement Account (IRA) or investing in other long-term savings and investment vehicles.

How to Plan for Retirement as an MSME Owner in Nigeria 

Many business owners get so wrapped up in running their businesses that they don’t think about their golden years until it’s too late. But it doesn’t have to be that way. 

Planning for retirement is crucial, and starting now can ensure you have a comfortable and secure future. Here’s how you can adequately plan for retirement as a business owner:

Assess your current financial situation

The first step is understanding where you stand financially. This means:

  • Reviewing your finances: Look at your current income, expenses, debts, and assets.
  • Understanding your net worth: Calculate your net worth by subtracting your liabilities from your assets.
  • Evaluating business value: Assess the current value of your business. This might require a professional appraisal.

Knowing your financial situation will help you identify how much you need to save and invest for retirement.

Set retirement goals

Setting clear, realistic retirement goals is essential. Think about:

  • Desired lifestyle: How do you want to live in retirement? Consider travel, hobbies, and lifestyle changes.
  • Retirement age: Decide when you want to retire. The earlier you start planning, the easier it will be to reach your goals.
  • Financial needs: Estimate your annual expenses in retirement and multiply that by the number of years you expect to be retired.

Having specific goals will give you a target to aim for and help you stay focused on your retirement plan.

Develop a retirement savings plan

Once you have your goals, create a savings plan to achieve them:

  • Determine savings rate: Figure out how much you need to save annually or monthly to reach your retirement goals.
  • Automate savings: Set up automatic transfers to retirement accounts to ensure consistent savings.
  • Adjust as needed: Periodically review your plan and make adjustments based on changes in your financial situation or goals.

A well-thought-out savings plan keeps you on track and makes reaching your retirement goals more manageable.

Explore retirement savings options

In Nigeria, there are several retirement savings options available to help individuals secure their financial future. These options include:

  • Voluntary contributions to Retirement Savings Accounts (RSAs): Individuals can boost their retirement savings by making additional voluntary contributions to their existing Retirement Savings Accounts.
  • Personal investment options: These include investing in mutual funds, stocks, bonds, real estate, and other financial instruments to grow retirement savings.
  • Mutual funds: Mutual funds gather money from multiple investors to invest in a diversified portfolio of securities, offering a managed investment option. To invest in mutual funds, open an account with a stockbroking firm or asset management company that provides mutual fund options. Popular choices include Stanbic IBTC Stockbrokers, Standard Chartered Bank Nigeria, and Cordros Asset Management.
  • Federal Government of Nigeria (FGN) Bonds: These bonds are secure investments backed by the Federal Government, providing fixed returns and a safe option for retirement savings. Investors can buy these bonds through NGX Trading License Holders who are accredited by the DMO to serve as Distribution Agents.
  • Treasury bills: Issued by the Central Bank of Nigeria on behalf of the government, these short-term instruments offer a low-risk investment option for retirement savings. To purchase Treasury Bills (T-Bills) in Nigeria, you can use several methods. Authorized dealers, such as commercial banks and financial institutions, often provide online platforms for easy transactions. 

Alternatively, you can buy directly from the Central Bank of Nigeria (CBN) in the primary market, with a minimum investment of around N50,001,000. In the secondary market, authorized dealers like banks, stockbrokers, and discount houses offer T-Bills with a minimum investment of around N100,000, in multiples of N10,000.

Leverage platforms that provide retirement savings options 

In Nigeria, there are several platforms designed to help self-employed individuals plan for retirement. One such option is the Micro Pension Plan (MPP) offered by different banks and financial institutions in Nigeria. 

This plan is tailored specifically for self-employed individuals and those working in small organizations with fewer than three employees. It enables them to save for their retirement effectively.

How to Plan for Retirement as a Freelancer 

In recent years, the freelancing industry in Nigeria has experienced significant growth. More Nigerians are opting for freelance work due to the benefits it offers, such as flexibility, autonomy, and a diverse range of opportunities. 

However, Nigerian freelancers face various financial challenges that can make it difficult to maintain stability and plan for the future. These challenges include irregular income, lack of employee benefits, and unpredictable workloads.

Despite these obstacles, freelancers can still plan adequately for retirement by following these tips:

Track income and expenses

Maintaining a detailed record of your income and expenses is crucial. Use apps or software designed for freelancers to keep track of your finances. 

This will help you understand your cash flow, identify trends, and make informed financial decisions. Regular tracking can also help you manage taxes more effectively, ensuring that you set aside enough money to meet your tax obligations.

Differentiate personal and business expenses

It’s important to keep your personal and business expenses separate. Open a dedicated business bank account and use it exclusively for freelance-related transactions. 

This separation simplifies financial management, makes it easier to track expenses, and can be beneficial for tax purposes. It also provides a clearer picture of your business’s financial health.

Keep a budget

Creating and adhering to a budget is essential for financial stability. Start by listing your fixed and variable expenses. Then, allocate funds for each category based on your average monthly income. 

Be sure to include savings and investments in your budget. Regularly review and adjust your budget to reflect changes in your income or expenses. A well-maintained budget can help you avoid overspending and ensure that you have enough funds to cover your essential needs.

The best budgeting strategy for many is the 50/30/20 rule. Here, you should allocate 50% of your income to needs (like rent, groceries, and utilities), 30% to wants (like dining out and entertainment), and 20% to savings and debt repayment. This strategy is effective because it provides a clear structure while still allowing some flexibility for miscellaneous spending, making it easier to stick to the budget in the long term.

Set retirement goals

Establishing clear retirement goals is the first step towards a secure future. Determine how much money you will need to retire comfortably and create a plan to achieve that amount. 

Consider factors such as your desired retirement age, lifestyle, and any potential healthcare costs. Use retirement calculators to estimate how much you need to save each month. Setting specific, measurable goals can help you stay motivated and on track.

Don’t know how to set retirement goals? Follow these processes: 

  • Assess your current financial situation: Take stock of your assets, liabilities, income, and expenses. This will give you a clear picture of your starting point.
  • Determine your retirement age: Decide when you want to retire. This will influence how many years you have to save and how long your retirement savings need to last.
  • Estimate your retirement expenses: Consider your desired lifestyle, housing costs, daily living expenses, travel plans, and potential healthcare costs. Don’t forget to account for inflation.
  • Calculate your retirement income: Identify all potential sources of retirement income, including pensions, and any investments or savings.
  • Set a retirement savings goal: Use retirement calculators to estimate how much you need to save in total and how much you should set aside each month to reach that goal.
  • Create a savings plan: Outline specific steps to reach your savings goals, such as contributing to an RSA, investing in stocks or bonds, or other savings vehicles.
  • Monitor and adjust your plan: Regularly review your retirement plan to ensure you are on track. Make adjustments as needed based on changes in your financial situation, goals, or market conditions.

Set aside money for emergencies

An emergency fund is a critical component of financial planning. Aim to save at least three to six months’ worth of living expenses in a separate, easily accessible account. 

This fund will provide a financial cushion in case of unexpected events such as illness, job loss, or urgent home repairs. Regularly contribute to your emergency fund to ensure it remains adequate.

Take advantage of retirement options for freelancers

Freelancers in Nigeria have access to various investment options that can help grow their savings. Retirement options for freelancers include: 

  • Simplified Employee Pension (SEP) IRA: Suitable for those with few or no employees, providing higher limits for contributions.
  • Self-Employed 401(k) Plan: This plan allows freelancers with substantial income to save more towards retirement.
  • National Pension Scheme: A long-term retirement savings option in Nigeria, offering tax advantages to freelancers.

Research and seek professional advice to choose the best retirement option for your goals and risk tolerance. Diversifying your investments can help protect your savings from market fluctuations and increase your chances of achieving a comfortable retirement.

Tips for Increasing Retirement Savings as an MSME Owner or Freelancer 

Earning more money is great when it comes to saving for retirement, here are some tips for increasing your retirement savings as an MSME owner or Freelancer 

Maximize tax deductions

Maximizing tax deductions involves utilizing strategies to lower your taxable income, which can free up more money for retirement savings. Here are a few ways to do this:

  • Contribute to retirement accounts: Contributions to accounts like a 401(k) or a RSA are often tax-deductible. This means you don’t pay taxes on the money you put into these accounts until you withdraw it in retirement.
  • Health Savings Accounts (HSAs): Contributions to an HSA are tax-deductible, and the money can be used tax-free for qualified medical expenses. Plus, any funds not used can grow and be used in retirement.
  • Charitable donations: Donating to qualified charities can reduce your taxable income.
  • Itemized deductions: Instead of taking the standard deduction, itemize your deductions to potentially lower your taxable income more significantly by including expenses like mortgage interest, medical expenses, and property taxes.

Diversify income streams

Diversifying income streams means having multiple sources of income, which can provide financial stability and more opportunities to save for retirement. Here are some ways to diversify:

  • Side hustles: Develop side businesses to supplement your primary income.
  • Passive income: Create passive income sources such as royalties from books or patents, income from a YouTube channel, or investments in peer-to-peer lending.

Adopt frugal living habits

Adopting frugal living habits can significantly increase the amount of money you can save for retirement. Here are some strategies:

  • Budgeting: Create and stick to a budget to track your income and expenses.
  • Cut unnecessary expenses: Identify and eliminate non-essential expenses, such as dining out frequently, subscription services you don’t use, or impulse purchases.
  • Smart shopping: Use coupons, buy in bulk, and take advantage of sales to reduce your spending on groceries and other essentials.
  • Energy efficiency: Implement energy-saving measures at home, like using LED bulbs, unplugging devices when not in use, and maintaining efficient heating and cooling systems.

Take advantage of Government initiatives and programs

Stay updated on government programs that can enhance your retirement savings. Look into initiatives such as the National Pension Scheme (NPS) or the Voluntary Contribution Pension Scheme (VCPS). 

You can also join cooperatives or associations that offer retirement benefits for self-employed individuals. Make the most of tax incentives or matching contributions provided by these programs

Automate your savings

Automating your savings can ensure that you consistently put money aside for retirement without having to think about it. 

You can set up automatic transfers from your main account to your retirement accounts. This can be done through your bank or financial institution.

Mistakes to Avoid When Saving For Retirement 

Planning for retirement is crucial, and avoiding certain mistakes can help ensure a more secure financial future. Here are 5 common mistakes to avoid:

  • Starting too late: One of the biggest mistakes is not starting to save for retirement early enough. The earlier you start saving and investing, the more time your money has to grow through compounding.
  • Underestimating retirement expenses: Many people underestimate how much they will need in retirement. It’s important to consider factors like healthcare costs, inflation, and potential long-term care expenses when planning for retirement.
  • Ignoring risk management: Failing to manage risks like market volatility, inflation, and longevity can jeopardize your retirement savings. Diversifying your investments, having a plan for market downturns, and considering insurance options can help manage these risks.
  • Not having a withdrawal strategy: Without a clear plan for how you’ll withdraw money from your retirement accounts, you risk running out of money too soon or paying unnecessary taxes and penalties. A well-thought-out withdrawal strategy can help make your savings last throughout retirement.
  • Neglecting to review and adjust your plan: Life circumstances change, and so should your retirement plan. It’s important to regularly review your retirement savings goals, investments, and other aspects of your plan to ensure they align with your current situation and goals.

Rounding Up 

Planning for retirement is not a luxury; it’s a necessity, especially for MSME owners and freelancers in Nigeria. While the journey to retirement may seem daunting, starting early and being consistent can make a significant difference.

Remember, retirement planning is not just about securing your future; it’s about ensuring you can enjoy your golden years with financial freedom and peace of mind. So, start planning now, and take control of your retirement destiny.

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