Question: Hi I always read your column and I’ve heeded your advice to invest in the stock market. I’m happy with my returns so far. What is a good and safe amount to set as goal retirement fund for us to be able to say that we are safe in our old age? – Marie via text
Hi Marie. Good for you! You must be dancing now. The PSE index just breached the 7,000 mark as I write my reply to you!
A lot of people have asked me that question – How much retirement money is enough? There are so many ways to answer that question and the internet provides several ways to compute for our retirement fund. These retirement calculators provide you an amount based on a set of assumptions – inflation rate, return on investments, your current expenses, salary, age, etc., etc.
My husband and I have thought of and discussed that question a number of times. And because of the many assumptions one has to contend with before he can figure out the amount, we thought of simplifying it for ourselves and the people who ask us. Anyway, who knows what the inflation rate would be when we reach 60 and beyond? Who knows what the rate of return our investments would have by then? And so on.
So here’s our simple answer: Your Annual Expenses x The No. of Years Before You Go to Heaven!
This means that if you plan to retire at age 60 and you see yourself to be living up to 80, and your total expenses for one year is P1 million, then you should have P20 million upon retirement. Each time I give this answer I always get this reaction, “What? That’s too big!” especially if the person who asked knows that his annual expenses are way above P1 million (which is the usual case), and he realizes that his retirement age gets closer and closer.
Again, this is a simplistic formula but it gives us an amount as our working goal. When my husband suggested this to me over a decade ago, we discussed and argued about these points, which may be the questions that you have in your mind right now:
1. Doesn’t the formula assume that our retirement fund won’t be earning anymore once we reach retirement age; otherwise, it should be a smaller amount? – We agreed that whatever returns our retirement fund would earn would cover for the inflation rate and some unforeseen expenses.
2. Can we just compute for a retirement amount which can give us interest earnings equivalent to our annual expenses? We will just spend the interest earned and keep the principal amount intact, which can be inherited by our children. – Well, this would be great if interest rates are predictable and will stay at relatively high levels throughout our retirement years. I remember having encountered bank clients who were LOI (Living On Interest). Everything was fine during the high interest rate regime. Back in the day we had “Double Your Money in Five Years!” and we (including our sons were invested in these instruments). If you compute for the effective yield, this is an interest rate of 15% p.a. compounded and that was quite popular then. But today, this is unheard of. When interest rates started to decline, a lot of LOI retirees started having problems.
3. We will not live up to 80 like our parents and grandparents. We have unhealthy habits that will lower our life expectancy. – Wrong! The fact is our life expectancy has been on the rise. And worse, because of our unhealthy habits, our final years may be subjected to more illnesses. And because of the advancement in technology there are more available treatments to further prolong our lives, which by the way, cost money! This brings us to the next point.
4. Health insurance – We hear of the prohibitive costs of chemotherapy, dialysis, stem cell, and other treatments. How can we make sure that we can afford these in our old age? In buying your health insurance after retirement, study the costs involved, especially if you have pre-existing conditions, and the other terms and condition in the fine print. There are some ailments that are not covered, and there’s a maximum age covered by insurance. So it’s still prudent to set aside money for this purpose in your retirement fund.
5. What kind of portfolio mix should I have for my retirement fund? – When figuring out the right mix, remember that you still have a long life to live upon retirement. And because of this you can still afford to invest a portion of your nest egg in long-term assets. There is a rule of thumb for stock investments which is “100 minus your age.” However, people who are not comfortable with the day-to-day fluctuations of the stock market will not be able to sleep soundly with this. If you’re among them, don’t. If you like real estate investments, this is another long-term asset class that can be good for you, especially if it gives you rental income. Do not limit yourself to fixed income assets just because you’re retired and you want everything to be risk-free. Remember, you still have a number of years ahead of you and keeping all your assets in fixed income instruments is actually risky because of inflation.
6. What kind of lifestyle do I want to have upon retirement? – This is the most important question in determining your retirement fund. Do you want to travel? Do you want to keep your big house even after the kids have left? Do you plan to be a generous grandparent who can treat his grandchildren to grand vacations? Or do you want to live more simply than how you do now? If your answer is yes to the last question, just so you can justify a lower retirement nest egg, then you better start simplifying NOW!
7. How much should I set aside for the inheritance of my children? That’s up to you but if you ask me, I suggest you don’t promise them anything. Commit to give them good education and the other learning opportunities you can afford without harming your retirement nest egg, and that’s it! They will strive to be more successful if this is their mindset – i.e. not counting on inheritance. A lot of parents think of their children’s weddings, MBAs, house and lot, inheritance, before their retirement nest egg. I think this is a BIG MISTAKE. We attended a parish activity some years back and the priest reminded us not to “overgive” to our children. In fact, at a certain age, let’s say, you’re 60 and all your children are already grown up adults earning their own keep, there’s really no need to keep on buying life insurance. Ideally, you no longer have dependents who will suffer if the breadwinner dies. (Now the tricky part is when you remarry, or in one way or another, get yourself a new set of dependents.) There was a couple we had dinner with who shared with us their parents’ disposition on inheritance. It goes like this: Do not expect any inheritance from us, but whatever is left, use it to send our grandchildren to the best schools that you cannot afford. I think this is a very good idea, especially for families who value good education.
8. “Never retire!” – For someone who left her promising career to be a full-time homemaker even before she reached her 30s, this line doesn’t seem to fit me. So what do I mean when I say this? Last weekend I had a conversation with a former officemate who recently retired before turning 50 and plans to live in another country with his family. He said he wants to do something else – he wants to work with his hands instead of his mind. We had an interesting conversation and I run the risk of taking his words out of context but this is what he said, “Given a choice, man would always prefer to have a good time over work!” and according to him, that’s what he’s going to do now. If we examine his statement, it seems like having fun and working are exclusive of each other. As I grew older and hopefully, wiser, I’ve noticed that they are not. The challenge just lies on our choice of career, the value we put on money derived from our career, and more importantly, the meaning we find in the work that we do. Then I wondered, “Could it be that he was in the wrong profession after all these years?” Well, it’s hard to think so because I’ve always considered him to be very good at his job. However, in my own journey I’ve also realized that different stages in our life brings us different needs. When I said goodbye to my career in the 90s I essentially “changed my career.” And I also tried hard not to really “retire” because I never allowed myself to stop “growing.” (Fortunately, I didn’t really grow in size, but that’s another story.) And because I’ve always told my sons, “Being bored is your own doing,” I have also been on my toes to avoid boredom in my stay-at-home status. Boredom is a sign of stagnation, so I would always do something if the B word starts creeping into my consciousness. So maybe what my friend really means is what a t-shirt message says, “Not retiring, just starting over!”
When retiring is viewed as starting over, it becomes exciting and something to look forward to! And having a good retirement nest egg is a prerequisite to an enjoyable starting over.
Here’s wishing you a happy journey in saving up for your retirement!
Retirement is one of the topics we will take up in FQ: A WORKSHOP ON FAMILY FINANCE this Saturday April 27, 2013, 1:00-5:30 pm at the Seameo Innotech, Commonwealth Avenue, Q.C. (beside UP Ayala Technohub). To reserve call or text 0917 5395770 or email firstname.lastname@example.org.