Will your retirement pay be enough to support you in old age
Consider yourself among the lucky few if your company offers a dedicated retirement plan for their employees. Not all companies offer a retirement plan because by law, companies are only mandated to offer a retirement pay. So, what’s the difference?
Retirement pay is dependent on a person’s employment performance and background and is funded by a person’s employer.
Republic Act 7641, also known as the Retirement Pay Law, entitles retiring employees to a retirement pay equivalent to at least one-half month salary for every year of service, a fraction of at least six (6) months being considered as one whole year. One-half month salary means “fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days service incentive leaves.” For an employee to enjoy this benefit, he or she should have, at least, served five (5) years in the company, aside from reaching the age of sixty (60) years old.
On the other hand, a retirement plan can be offered by an employer or could be set up by an individual. Usually, retirement plans allow an employee to contribute to a fund, which is matched by the employer. This fund is then invested in various investment vehicles. Unlike the retirement pay, the retirement plan does not promise a specific amount in terms of benefits when you retire.
How much can you get from your retirement pay?
It is important to first ask the question, “Am I entitled to a retirement pay?”
The Retirement Pay Law has several exemptions. It does not cover employees of retail, service, and agriculture establishments. Companies with only ten (10) or less number of employees are also not covered by the provision of the law. Plus, as provided in Republic Act 7742, the employer can consider the Pag-IBIG Fund as a substitute retirement benefit for its employees as long as they shared in the employee’s contribution.
Let’s assume that you’re earning PhP 20,000 a month, which is the maximum monthly salary credit, and you are entitled to receive a retirement pay. If you’ve been with your company since you were 20 years old and will retire when you’re 60 years old, how much will you receive by the time you retire? [1]
Formula: Minimum retirement pay [2] = Daily rate [3] x 22.5 [4] x Number of years in service [2]
Computation: PhP 600,300 = PhP 667 x 22.5 x 40
Getting about half a million pesos sounds good enough. Aside from your retirement pay, you may also get government benefits such as your Social Security System (SSS) pension.
Factoring in your SSS pension
Let’s say you’re paying the maximum SSS contribution for a PhP 20,000 monthly salary, you’re likely paying PhP 2,400 every month. With this, how much are you expecting to get when you retire?
The computation involves the following components: Monthly Salary Credit (MSC),the median of the compensation range; Average Monthly Salary Credit (AMSC), computed based on the last five (5) years of an employee’s service; and Credited Years of Service (CYS),the total number of years you contributed to the SSS fund.
There are three formulas available to compute your SSS pension benefits. Whichever of the three formula yields the biggest amount would be the basis of your pension: [5]
Formula 1: Pension = PhP 300 + 20% of AMSC + 2% MSC for each CYS in excess of ten (10) years
Formula 2: Pension = PhP 1,000 if CYS is less than 10 years; PhP 1,200 if CYS is greater than 10 years; and, PhP 2,400 if CYS is equal or greater than twenty (20) years
Formula 3: Pension = 40% AMSC
To illustrate this better, let’s compute to get the maximum pension benefit you will likely get. Let us peg the CYS at 40 years, which means you started working when you were 20 years old and you would retire by the age of 60.
Computation 1: PhP 12,430 = 300 + 0.2(20,000) + 0.02(20,000)(40-10)
Computation 2: PhP 2,400 = working for more than 20 years
Computation 3: PhP 8,000 = 0.40(20,000)
Based on these computations, the maximum amount of pension you may get is PhP 13,100. But this is based on the assumption that you have worked forty years of your life, while paying for the maximum contribution amount. In reality, not all people will enjoy the same amount of SSS benefits. The monthly average SSS pension is at PHP5,123. Will this be enough to shoulder your monthly expenses? [6]
Will you have enough money for your retirement?
According to data released by the United Nations Population Fund in 2019, the total life expectancy of Filipinos is about 71 years. If you distribute your retirement pay of PhP 600,300 across your assumed 9 years of retirement, you will have PhP 5,558.33 every month (P600,300 distributed to 108 months (9 years). Add to this the projected PhP 13,100 SSS pension, you will have a total of PhP 17,541.00 every month. [7]
If you remain the breadwinner even at this age, you will still need to support the needs of your family. According to the Philippine Statistics Authority, the average annual family expenditure for 2018 is at about PhP 238,641 per year. You will need to steadily earn PhP 18,166.66 a month for you to provide your family’s needs. [8]
If we base your monthly retirement income on the projected retirement pay and SSS pension amounting to PHP 17,541.00, you will still fall short by PHP 625.66 in the projected monthly budget. The computation does not include inflation and the cost of possible healthcare expenditures brought about by old age. If you encounter any additional expenses, you may probably end up in debt and determining where to get extra income during retirement may be more challenging.
Relying solely on your company’s retirement pay or government benefits such as your SSS pension may help you get by with a little scrimping, but the goal is to have a comfortable retirement where you don’t have to worry too much about where to get the resources you need.
The best way to achieve your retirement goal is to plan ahead and to make the necessary steps to grow and protect your money. Aside from savings, getting an investment-linked life insurance is one of the ways to secure your financial future. You’ve worked long and hard enough, it is time that you make your money work for you. Consult a Pru Life UK agent to determine the best way you can prepare for your retirement.
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REFERENCES:
1. SSS Inquiries. SSS Contributions Table and Payment Deadline 2020. [Internet] 2019. [cited 2020 September 28] Available from: https://sssinquiries.com/contributions/sss-contributions-table-and-payment-deadline-2020/
2. Labor Code of the Philippines 2017 (PHI) Article 302. [Internet] 2017 [cited 2020 September 28] Available from: https://www.dole.gov.ph/php_assets/uploads/2017/11/LaborCodeofthePhilippines20171.pdf
3. Excluding COLA
4. 15 days salary + 5 days Service Incentive Leaves + 2.5 days 13th month
5. Social Security System. Retirement Benefit. [Internet] [Date unknown]. [cited 2020 September 28] Available from: https://www.sss.gov.ph/sss/appmanager/pages.jsp?page=retirementpension
6. Villanueva, J. Filipinos urged to avail of voluntary retirement savings plans. Philippine News Agency. [Internet] 2020. [cited 2020 September 28] Available from: https://www.pna.gov.ph/articles/1114745
7. United Nations Population Fund. World Population Dashboard - Philippines. [Internet] 2019. [cited 2020 September 28] Available from: https://www.unfpa.org/data/world-population/PH
8. Philippine Statistics Authority. Final 2018 Family Income and Expenditure Survey (FIES) Press Release and 2018 FIES Final Report. [Internet] 2020. [cited 2020 September 28] Available from: https://psa.gov.ph/content/final-2018-family-income-and-expenditure-survey-fies-press-release-and-2018-fies-final