Here is how to avoid poverty during your retirement
In Graph 1; unless you are lucky to be born in a wealthy family, your personal wealth (driven by your earning potential) starts from the bottom.
Your wealth will grow or stagnate depending on your productivity, financial discipline and shrewdness.
Many people start earning at the age of 20; and reach their productivity peak at the age of 45. After this time, they start losing momentum, energy, as different health challenges take a toll on their work ethic. Beyond this age, productivity starts decline.
If you solely rely on your capabilities (earning only when you are working), your net worth will fall as you reduce your working hours due to old age.
For that reason, you must start early to save and invest in income generating assets like stocks or sustainable businesses to ensure steady cash flows past your retirement age.
At your point of Retirement (R), your wealth will decline faster than your productivity unless you have side investments or businesses to hedge you against loss of productivity.
After the retirement point, your wealth will decline further as you will be consuming without any income, or your consumption will be higher than your revenues. This is a very bad state to be in as it leads to the poverty point – the point at which the wealth and productivity lines touch the horizontal line, x.
You must plan for your retirement at an early age by saving and undertaking investments that will enable you to earn than to oscillate around the poverty point and being at the mercy of the state’s social protection program.
If you are lucky to access social protection benefits, your wealth will not slide below the poverty line – the horizontal line x. However, this stipend will just be sufficient to keep you surviving.
In Graph 2:
Majority of people’s wealth start from zero (they have nothing on their bank accounts) and increase it gradually depending on their areas of expertise, lifestyles and productivity. If you cannot earn when you stop going to work, then your revenue is solely based on your level of productivity. It is not a sustainable situation. You must start early to plan on changing the status quo.
If you are salaried employee in the private or public sectors are paid on a monthly basis, your wealth will tend to show a positive growth trend as shown in Graph 2. As your productivity increases, your monthly net pay will tend to be revised upwards, until a time when you are unable to earn more for your labor input.
To avoid sliding into the poverty point, you must save and invest in income generating assets like stocks, properties in good locations and businesses in high growth areas. That way, your wealth accumulation will not be tied to your productivity alone. Even if you don’t go to work, your investments or properties will bring in revenue. If you invest and establish a sustainable business model, your wealth will continue growing regardless of your age or your state of health.
That is what “earning even while you are asleep” is all about.
For entrepreneurs, the wealth graph may not be as smooth as shown in graph 2 above.
You will experience ups and downs depending on the success of your business. At start-up, the curve may start from negative (indicating borrowed funds injected into the business as startup capital). A series of ups and downs during your business growth may be experienced, which may even out into positive growth over a period time or depending on the nature of your business.
Tech and other companies characterized by high innovation will tend to stabilize within a short period of time due to their high growth potential. As an entrepreneur, your focus is to achieve high growth and implement strategies to ensure continuous success and sustainability of that growth.
The long-term goal of any business venture is to outlive its founder/s. Companies like Microsoft, Apple and Toyota, among many others, have attained this due to their ability to establish proper business processes, systems and structures. Such companies also have mechanisms in place to ensure the established structures and systems work as intended in addition to on-going self-review mechanisms for continuous improvements in response to business needs.
In Uganda, many businesses collapse on the death or retirement of their founders due to lack of proper succession planning. Succession planning is not about identifying and nurturing in-house talent to take over the business leadership par see. That is a narrow view of the concept. It is about establishing robust systems, processes and structures and ensuring an effective implementation strategy to enable consistency, suitability and ease to implement.
You want a system where new hires are easily trained about the company culture and processes in the shortest time possible. The ability to enable easy assimilation of new business partners into the ways of the company is what separates a star company from an average one.
If you notice, in Graph 2, one can retire at the age of 28 or 40 (at the peak of their productivity) because they are not relying on their physical efforts to earn revenue. Once you establish successful businesses or investments with alternative streams of revenue, you won’t have to go to work to earn.
You can retire (from hard labor) any time as your business systems will do the work for you.
That should be the focus for all professionals: save, establish good investments, enable sustainability and step aside.
Stepping aside gives you discretionary time – the ultimate definition of success.
Please note the definition of wealth is subjective. It also depends on the cost of living in a given environment. Someone earning US $1,000 monthly revenue living in Kampala (Uganda) could be generally well-off and socially secure than another earning about US $5,000 monthly revenue in a city like New York (USA) due to sophistication of the society and high cost of living in a developed economy.
As stated in The World Bank, Poverty Analysis Overview, “poverty lines vary in time and place, and each country uses lines which are appropriate to its level of development, societal norms and values.” I couldn’t agree more.
You don’t have to earn a million dollar a month to be considered wealthy. Your ability to be financially independent by being able to afford your basic needs and wants, and sparing some to help the community is good enough.
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Copyright Mustapha B Mugisa, MBA – Your Success Partner. 2014 All rights reserved.