When you think about life after age 65, you might imagine basking in the sun by the seaside, enjoying a serene life on a peaceful farm, or exploring new cultures. Whatever you envision, achieving it requires strategic planning for retirement. There are five crucial steps to take to get started.
1. Assess Your Current Financial Situation.
Financial planning for retirement begins with an honest look at your financial standing. Evaluate your current income, expenses, assets, and debts. Remember to factor in healthcare costs and your options, such as long-term care insurance and HMO.
2. Calculate How Much You Need During Retirement.
Define your goals, taking into account your desired lifestyle, retirement age, and life expectancy to estimate the needed income. You can use a retirement calculator that factors inflation and cost of living. Or, you can try retirement planning using these formulas:
Apply the rule of 25
The rule of 25 rule is a popular saving method among enthusiasts of the "Financial Independence, Retire Early" (FIRE) movement. It involves multiplying annual expenses by 25 to determine how much you need to save for retirement, according to Forbes.
If your annual expenses come to ₱960,000 (or ₱80,000 monthly), this is the amount you'll need to retire using the rule of 25.
960,000 x 25 = ₱24,000,000
You are not alone if you find this number overwhelming. That's why FIRE devotees drastically reduce expenses to save or make plans to increase their income when planning for retirement. Some decide to continue working a part-time job after retirement.
Peg expenses at ₱100,000 a month
Think tank Oxford Economics says middle-class households have an annual disposable income that ranges from ₱1 million to ₱3 million. That means a Filipino retiree needs around ₱100,000 monthly. Multiply this amount by life expectancy to arrive at your target savings.
With life expectancy in the Philippines at 70 years, according to the World Health Organization (WHO), retiring at 60 means your target retirement savings will look like this:
100,000 x 12 months = ₱1.2 million annual cash flow
1.2M x 10 years = ₱12 million in retirement savings by age 60
However, take note that life expectancy has been increasing. Planning for retirement that can last several decades is ideal, especially if you want to retire earlier than 60.
3. Adjust Lifestyle Expectations.
Once you know how much you want to save for retirement, record your expenses and calculate your average spending for the last three to six months. Create a budget if the results show you need to trim the costs. Try using one of the free budget templates from Microsoft Excel or Google Sheets if you have never created a budget.
At this stage, some people look at downsizing or fine-tuning lifestyle choices when planning for retirement, especially when current finances are tight. Others explore alternative ways to earn extra income. They look into part-time work, rental income, or other investments that can contribute to covering living expenses.
4. Set a Monthly Savings Target and Stick to It.
Prioritize setting up an emergency fund if you don't have one. You want to avoid dipping into your retirement savings prematurely during financial challenges. Automatically put salary increases, 13th-month pay, and even interest from high-yield bank accounts into building your retirement fund. You can use it for investments if it's a sizeable cash.
5. Grow Your Retirement Fund With Different Investments
Consult an expert like an AIA LIfe Planner about creating a diversified investment portfolio that includes a mix of stocks, bonds, and other assets. Investing can be an excellent way to make more money, but it involves risks. You can reduce that risk by spreading your money across different investment vehicles, such as the following:
Pension plan
Planning for retirement in the Philippines means you and your employer contribute funds to the Social Security System (SSS). SSS invests these funds to provide you with a fixed income based on salary and years of service. As of 2022, SSS also offers its members the Worker's Investment and Savings Program (WISP) Plus, a voluntary retirement savings plan on top of its regular pension program. SSS says WISP Plus offers "investment earnings based on rates higher than those provided by banks."
VUL Insurance
Variable Universal Life (VUL) insurance is a type of life insurance plan with an investment component. Take AIA Philippines' Future Builder as an example. Policyholders have access to various investment options, allowing the cash value to grow based on market performance. Besides giving your money better potential to grow, VUL insurance offers protection from unforeseen circumstances that can drain your savings. AIA Future Builder comes with life insurance coverage and science-backed wellness program AIA Vitality.
Real Estate
Real estate investment is a popular passive income generator, which refers to money earned with minimal effort or active involvement. Rental income from tenants or profit through property value appreciation upon sale can help boost planning your retirement.
Government Bonds
The government issues this financial instrument to raise funds. It is a type of debt security—you lend money to the government in exchange for interest payments. You receive these interest payments until the bond matures and the government returns the principal. Government bonds are generally considered a safe investment option because you get what you lent the government in full despite the market conditions.
Mutual Funds
A mutual fund is a pooled investment vehicle that combines money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. Managed by professional fund managers, mutual funds can offer a convenient way to access a diversified portfolio, reducing risk. When people buy shares in a mutual fund, the fund's value goes up or down based on how well the financial products perform. Any profits or losses are shared among the shareholders.
Aside from these vital steps, it's important to feel free to seek assistance when planning for retirement. An AIA Life Planner can help alleviate your financial anxiety by customizing your plan to suit your needs and circumstances. You can prepare for retirement with a greater peace of mind and better prepare you for your golden years.
