Everyone needs to stop working eventually. This means that there will come a point in time when your income will have to come from something other than your job. In an ideal world, we would all have started planning for old age the moment we received our first salary. Unfortunately, preparing for a financially comfortable retirement is not a priority for most of us.
According to a survey by The Global Aging Institute (GAI), in partnership with PruLife UK, as much as 90 percent of Filipinos worry about not meeting their financial needs upon retirement1. The study also revealed that “only 68 percent of Filipino workers expect to receive Social Security System or Pag-IBIG Fund benefits when they retire, while just eight percent expect to receive income from financial assets like insurance or annuity products and stocks, bonds, or mutual funds.”
This lack of money skills and financial literacy is a very expensive problem. Many of us think that savings in the bank or government benefits are enough to sustain our financial needs upon retirement. Even worse, some simply adopt the “bahala na” attitude and burden their children to take care of all their expenses. Too often, Filipinos go into retirement without a concrete plan. Some are even forced to work even if they are beyond the retirement age because they need income.
Savings and inflation
Putting your retirement money in the bank is not entirely bad. It’s important to have some cash for emergencies and short-term needs. However, inflation will eat up your savings as years go by. Inflation is the rapid increase in prices over months or years2. Let’s say you set aside one million pesos today for your retirement. The same one million pesos will no longer have the same value twenty years from now.
The average inflation rate in the Philippines is 3.18%3. However, most time deposit accounts in the country offer only less than 2% interest. This means that if you put all your retirement money in the bank, you lose purchasing power because of inflation. To keep the value of your money, it’s important to look for options that will give you higher returns -- here’s where investments come in.
Crafting your retirement plan
How do you start creating a retirement plan that is more strategic than just putting money in the bank? You have to know what age you want to retire and your ideal income during retirement.
Your expenses in old age will be different from your expenses today but you can base your retirement needs on your projected level of spending. Imagine the kind of life you’ll be living. For example, your children might be grown up by then, and you’ll no longer need to support them. Ideally, you should have also finished paying off your house amortization and debts. Work-related expenses will also disappear. However, there might be additional expenses that you don’t have today such as prescription medicines, additional household help for chores you can no longer do, and maybe you’d want a little allowance for hobbies and travel.
Look at your current lifestyle and determine how much you spend monthly. Pay special attention to recurring expenses such as utilities, grocery bills, rent and medical but also consider the variable amounts you spend on weekend mall trips, grooming needs, and gifts.
According to the Philippine Statistics Authority4, the average annual family expenditure for 2015 is at PHP 215,000. A widely accepted financial advice says that you need 70% of your income to maintain your current lifestyle, which means you need PHP 150,000 a year upon retirement. This doesn’t even take into account inflation yet.
After you stop working, you don’t know how long you will live. But you need at least PHP 150,000 a year as long as you’re alive. One approach you can explore is to live off the interest of your investments. This way, you won’t worry about running out of money if you live longer than what you planned for. If you need PHP 150,000 a year, and make investments with a 4% interest*, 150,000 divided by .04 shows that you need to come up with an investment that has PHP 3,750,000 interest for a comfortable retirement.
Determine how many more years you have before you retire. This is the time you have to come up with your 6 million capital. Also, remember that returns from investments are not guaranteed, so give yourself a little buffer.
Diversification and managing risks
“Don’t put all your eggs in one basket,” they say. Diversification5 is one of the oldest concepts in investment. It simply means knowing to spread your investments in different options to help manage risks.
Whether you’re a “conservative” person who can’t afford to lose your initial capital or someone who can take on bigger risks, there’s an investment option for you. Money market funds, time deposits, and government bonds are examples of “safer options” while the stock market, currency trading, and cryptocurrency are examples of “riskier” ones. Ideally, a financial adviser, can create an investment portfolio that reflects you risk appetite and time horizon. Don’t forget to invest in insurance products that can help take care of hospitalization bills when an unexpected illness strikes.
Many of us think that we can start investing for retirement at 50 years old, when all the kids are nearly done with college. However, this is a poor strategy because time is an important element that will help your money grow better. Don’t wait too long before you start planning.
You are not just planning for yourself
In most Filipino households, conversations around money, retirement, poor health, and growing old are often avoided. Parents rarely talk about their investments or debts or savings. Their children become blindsided when their parents get sick and hospital bills start piling up. Siblings argue about who should take care of a parent who needs financial support.
It may be uncomfortable to talk about money and retirement, but being more open about things like this at home can help build a stronger financial foundation that can benefit the entire family. While children should never be considered as a retirement plan, most of them would lovingly help out when they can. But it’s important to let them understand the situation to help them prepare for what can happen.
Planning your retirement is not just about the money. It’s about having the ability to enjoy old age without burdening your children and other relatives who should be concentrating on saving up for their own families. It’s about being financially independent and being in control of your life even when you are no longer earning money from work. It’s about peace of mind and confidence that you can happily spend your retirement years with less worries.
*As mandated by the Insurance Commission, investment-link insurance products need to show projected earning rates at Low (4%), Medium (8%), and High (10%)