How Much Do You Need To Save For Your Retirement? September 4, 2008
Posted by mona in : saving , trackbackAs I grow older and my knees get weaker (from overwork and stress), my thoughts often wander off to RETIREMENT. It would sure be nice to just sit back, relax and and enjoy the fruits of years of hardwork. But what really is in store for me when I retire? Would I have enough to really sit back, relax and enjoy?
The saddest thought for me would be finding myself putting the burden on my children to spend for my hospitalizations and medications and living expenses when I’m old and grey. Nope. I don’t want them to go through that. So what should I do?
Retirement plans in the Philippines are almost as unknown as the language they speak in Mars. Aside from our own personal savings, most of us rely on the pension from the Social Security System or the Government Service Insurance System, which guarantees that we could get something out of the monthly contributions we make to these institutions when we retire. And there are also pension plans from the pre-need companies. However, with the current state of the insurance and pre-need industry in the Philippines, some people are not really keen on investing in these instruments right now (specially after CAP and Pacific Plans left their education planholders in mid-air - huhuhu!).
Of course, even if we do have the money and want to invest in these pension plans, we may get like 500grand or even a million bucks guaranteed when we retire. We could add that up with our savings and we could come up with a handsome figure.
BUT WOULD THAT MONEY BE ENOUGH 30 YEARS FROM NOW?
How sure are we that what we’re going to get would be enough to cover for our living (and dying) expenses? Somehow we still need to think that the money must be invested in order for it to contInuously earn passive income so that we will be assured that we’ll never go broke when we retire.
So, again, it goes back to the question of HOW MUCH DO I REALLY NEED TO SAVE UP FOR MY RETIREMENT?
I asked around for help and stumbled upon an answer from a friend who taught me how to compute for the “future value” of money.
You need to identify certain factors first before you can start computing.
1. How old are you now and at what age do you want to retire? The difference between your age now and the age when you want to retire is equal to the time left for you to save up. The later you start saving, the less time you have. And the lesser the time, the bigger the money that you need to put away for savings.
2. If you are to retire TODAY, how much money or monthly income do you need to live the life that you want? The amount of money you need to save for retirement would largely depend on the lifestyle that you want to lead. Do you intend to travel a lot? Do you need a nurse, a maid or a driver? How much does the doctor’s fees now? You need to peg a value to these using TODAY’S prices.
3. What is the projected annual inflation rate? A lot of people make the mistake of not taking inflation rate into consideration when they try to save up for the future. You have to be aware of this so you’ll more or less have an idea if what you are saving right now would really amount to anything in the future. It is a fact that as time goes by, money loses its value cue to inflation. What you can buy with your 1,000 bucks next year may be significantly less than what you can afford to purchase with it right now.
So, once you have all those things factored out. Here’s the formula for the future value (FV):
FV = monthly income*(1+projected annual inflation rate) ^ # of years to save
( ^ means raised to the power of )
Example:
You are 30 years old now and you want to retire at the age of 55. That leaves you with 25 years to save up.
Based on your computation using current prices, you come up with 100,000 monthly income in order for you to live the life that you want if you were to retire today.
Let’s say you peg the inflation rate at 5%
Using this formula: FV = monthly income (1 + projected annual inflation rate)^number of years
You’ll come up with:
FV = 100,000 pesos (1 + 5%) ^ 25 years
FV = 100,000 pesos (1.05) ^ 25 years
FV = 100,000 pesos * 3.38635
FV = P338,635
This means that the future value of your 100,000 bucks 25 years from now is more or less equivalent to P338,635. So with this in mind, your retirement fund should amount to P40,636,200 This should be invested in an instrument that would yield at least 10% per annum to give you an annual passive income of P4,063,620 or P338,635 per month.
Sounds pretty scary, huh? So don’t wait till you’re 30 to save up for your retirement.
Comments»
[...] ResourceShelf wrote an interesting post today onHere’s a quick excerptAs I grow older and my knees get weaker (from overwork and stress), my thoughts often wander off to RETIREMENT. It would sure be nice to just sit back, relax and and enjoy the fruits of years of hardwork. But what really is in store for … [...]
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
Hi, Allen!
Thanks so much!
I hope you could share your insights here as well.
More power!
– mona
Hi,
What do you think is the best instrument for investment. If I have some savings today, where should I put it? (considering that owning a business is not an option). Thank you.
Hi!
With the recent shakes in the stock market and other related industries like banking and insurance, it’s tough to look for really secure instruments. But if you’d ask me, what’s safe is what’s best.
Over investing in stocks or placing it in “prosperity plans” like that of Sunlife’s, I’m still more comfortable with banks. You could check out your bank for offers of high yield placements.
Here are a few things you need to consider though:
- Check out the bank’s reputation. Savings and rural banks offer higher interest rates than commercial banks BUT they’re more prone to bank-runs.
- Deposits are insured only up to a certain limit. Try not to put everything in one basket. With the way things are going right now and all the unexpected turn of events, it’s safer not to go beyond that limit.
- Choose a term that you’re comfortable with. Of course, the longer the holding period, the bigger the returns. But what if you need the money? Of course there’s always the option to preterminate but it is not advisable because you might just end up losing after all the fees have been deducted.
There some people I know who are investing in real estate, especially now that a lot of properties are being foreclosed by banks and lending institutions. This, however, is for the more “gifted” not only in terms of cash but also in the skill of “predicting” which property would appreciate faster. You can opt to do this if you want to, but remember, a piece of land is just that - a piece of land till it starts earning money for you. Also, real estate is also something that’s very hard to dispose when you need the money right away.
Wow, thanks Mona for the great advice. I have another question. I have invested in Sunlife’s VUL since last year. Do you think it was a bad decision after all?
Hi again!
I believe getting a premium life insurance such as a VUL is never a bad decision. If you’re from the Philippines (are you?), SunLife Phils has repeatedly declared that it is a stable company with no exposure to Lehman Brothers. So, I guess there’s really no need to worry about it. Shaky as the pre-need and insurance industry is here, somehow we just need to place our trust in the people behind it to really know what to do and how to handle the hard-earned money we place with them.
I must admit that I have always been critical of pre-need and insurance products. I have often gotten into discussions with agents whenever I pose the question - HOW CAN YOU GUARANTEE THAT WHAT MY FAMILY WILL GET WOULD BE ENOUGH TO ENSURE THAT THEY WOULD BE ABLE TO MAINTAIN THEIR STANDARD OF LIVING? This was even made worse when we fell victims to Pacific Plans’ “disastrous” traditional education plans. All of my daughter’s education plans from elementary all the way through college
have been compromised by a company that had claimed to be stable and guaranteed that they would pay for my kid’s full tuition fees no matter when and where she studies.
But whatever it is that has happened to us with Pacific Plans didn’t stop my husband and me from getting our life insurances from another company. Death is inevitable and we simply needed that feeling of “security” that our kids will not be left empty-handed when we die. Our insurances won’t probably amount to much with the way the economy is going. It won’t make our kids multimillionaires when we die but we think it would help them somehow. And besides, we don’t really like to leave our kids with too much money which we think would inevitably rob them of the ability to strive and dream. (which I have blogged about already in http://theheadquarters.168center.com/2008/08/12/kids-and-business-a-mothers-point-of-view/)
Going back…It’s really an issue of trust. In this life, we’re really left without much choice but to place it in institutions like the government (however much we hate the system), the banks, and yes even insurance companies included.
I know I am beginning to sound pessimistic but I just believe that there is no such thing as “enough” or a “100% guarantee”. No one can really say what’s gonna happen next. I guess the key here is to NOT put “everything” into one basket and learn to peg a “safe” limit to your exposures.
I hope I was able to answer your question.
Thank you Mona! You’ve really been helpful. Yes, I’m from the Philippines and I’m 24 years old. I’ll keep on visiting your site, I’ve saved this in my Favorites.
You’re always welcome!
9mke6f Thanks for good post