Thanks to improvements in the quality of life and health care, populations in developed and developing nations are living longer. The average life expectancy in the Philippines is 68 years for male and 73 years for female. This is great news for the society. However increasing longevity also creates new challenges for all of us, as we need to have the required finances in place to support longer life span and our desired retirement life style.
1.) Know how it works
Among all the various financial needs that we have, retirement savings is the most challenging one to plan and execute, simply because of the time element and the uncertainty associated with longer period.
Typically retirement savings focuses on two stages. The first one is the accumulation phase, wherein you build a lump-sum amount before your desired retirement age. The objective of this stage is to generate above average returns. The second stage is the actual retirement phase, wherein you focus on generating steady returns.
2.) Determine how much you need
The thumb rule for establishing your retirement nest is as simple as taking into consideration your annual household expenses and dividing it by the interest rate you generate from bank deposits.
For example, if our monthly household expense is Php 50,000, our annual household expense is Php 600,000. Divide it by 3%, the prevailing deposit rate, we will come up with Php 20 million. In other words, if we have Php 20 million today, we can place in bank deposit at 3% interest rate and generate Php 50,000 every month and carry on our livelihood.
3.) Consider the impact of inflation and interest
The real challenge to retirement savings comes when we have to make assumptions on what will be our monthly household expenses come retirement and what will be the rate of return we can generate from our savings.
To keep it easy and simple, if our lump-sum requirement for retirement is Php 20 million in today’s scenario, we need to add up the rate of inflation, let’s say 5% for every year from now to the targeted retirement age. In our example above, the lump-sum amount that we need to build towards retirement if we were to retire after 20 years is Php 53,065,654.10.
These factors are being taken into account to make sure that the long-term return that we are to generate from our savings is well above the rate of inflation. If not, we will eventually be unable to maintain the purchasing power necessary to sustain us during the actual retirement phase. This aspect of maintaining or enhancing one’s purchasing power is critical to building a retirement fund.
4.) Identify your retirement savings options
Equities are perhaps the best-known form of investment. They are also known as shares, because they are literally, a share of ownership in the company that issues them. For this reason, prices tend to increase or decrease according to the profitability, assets and prospects of the issuing company.
Investing in Equities offers the greatest potential for an attractive return. In general, Equities can be expected to outperform other forms of investment in periods of rapid economic growth, when company profits rise. Hence, Equities are considered an important investment option for retirement savings, especially during the accumulation phase.
However, investing in equities can be quite difficult for many due to lack of time, knowledge, expertise and a large amount of money needed to achieve a diversified investment portfolio.
The good news is common investors can access these valuable investment opportunities at ease without the hurdles associated with directly investing into equities. Thanks to the availability of products like mutual funds and investment-linked insurance policies, everyone can now plan and execute their retirement plan.
5.) Review your retirement plan frequently
Given that we are making many assumptions in terms of inflation and interest rate, it is important that we review the plan and its progress from time to time and make requisite adjustments along the way. Consult a qualified professional who can help you draw up your retirement plan, identify your savings options and rebalance your retirement portfolio when necessary.
PHOTO CREDIT TO: MONEYSENSE
ABOUT THE AUTHOR
Naresh Krishnan is the Chief Operating Officer of Sun Life of Canada (Philippines), Inc. He has 20 years experience in the financial services, Mutual Fund and Life Insurance industry gained from his extensive experience in India, Indonesia and the Philippines. Starting his career in the Indian financial services industry, he played a pioneering role in introducing bank distribution of mutual funds. In Indonesia, he spearheaded wealth management, bancassurance and corporate distribution divisions for a life insurer. Prior to joining Sun Life Financial in the Philippines in January 2010, he was the President and CEO of a joint venture bancassurance company. In his current capacity at Sun Life Financial, he spearheads the various distribution channels and the mutual funds business.
We are responsible for the creation of our own retirement fund. whatever your company will provide you after you retire. I promise you its just going to last 3 to 4 years. You have to plan and recallibrate regularly to see if the your goals are being met.
It’s my first time here in this site and I am glad to know that Sun Life have this site to educate financial literacy not just to Filipinos all over the world but also to all people in general. This is also my advocacy in my blog. I hope that more and more people in the world will achieve financial freedom in the future through our advocacies.
A Retirement Plan should be basic and compulsary and should be prioritized by everybody once he/she starts earning.
In as much as we would like to secure the future of our children and extend the help to our aging parents, we should equally apportion our budget for our personal retirement and we should not feel guilty about this.
Retirement should be a time to look forward to and enjoy life more comfortably.