Retirement Planning. Efren Ll. Cruz, RFP

Transcription

1 Retirement Planning Efren Ll. Cruz, RFP I am young, healthy and at the peak of my career. Besides, there are so many other things I have to budget for like my kids college education, a larger home, a new car, that dream vacation home in Tagaytay, a family trip abroad So why do I have to bother with retirement planning now? If we look at it from this line of reasoning then, it does not seem to make sense to make a fuss about retirement planning now. To me, however, this line of reasoning is not true reasoning but just an exercise in giving a bunch of excuses. Retirement is never tardy. It is as certain as death. We just do not know which will come first. There is a very real risk in not preparing for retirement. Retirement, when we compute its cost, will amount to a staggering amount in that part of our life when we are the least productive. Sure, we can count on our children. But do we really want to impose on them our financial care at the time when their own family expenses are just building up? Yes, by the time we reach 60 years of age, our children would just be establishing their own families and incurring heavy financial burdens themselves. And what happens when we outlive our money? Do we really want to go through retirement deprived of the simple luxuries that we were so used to enjoying during most of our life? Worse, we may not even be able to retire. Firstly, let s get one thing straight. Retirement is never about completely stopping all forms of work and taking one vacation trip after another. Sure, we will have more leisure time on our hands. But more and more retirees nowadays trudge on with some form of work. There are four basic retirement needs. These are financial independence, emotional security, companionship and respect. Whether it is for pay or not, working in retirement, helps to fulfill such needs. Besides, life in retirement will be a total bore if it is all play and no work. This is why financial planners do not call them retirees anymore but 1

2 seniors. Yes, seniors because people, after reaching retirement age, still opt to work. As seniors they remain critical contributors to the growth of society as a whole. This is one of the main reasons why Congress passed the Senior Citizens Law governed by Republic Acts 7432 and Secondly, life expectancies are continuously getting longer. While females tend to live longer than males, both are expected to live much longer due to healthier lifestyles and advances in medicine and technology. In my seminars, I joke about how old people, just by taking food supplements, can now walk backwards without tripping. Seriously though, the advances in stem cell research, controversial as they may be, may soon do away with the need for transplants. Who knows, just a few years down the road and people would only need to get a shot of stem cell boosters to regenerate their ailing vital organs like the lungs, heart and kidneys. The message then is clear. We cannot assume that the cost of our retirement will not be significant just because we will not live long after retiring. Nowadays, a 10-year retirement period may be too short. Some financial planners even plan up to the age of 100, just so they can be sure that their clients will not outlive their money. By the way, while we will tend to live longer, our body will still start to weaken usually by mid-life or around the age of forty. Diseases can still be contracted. That is why there should be advanced retirement planning so that provisions for combating such diseases will be available if and when they hit. And as a component of retirement cost, healthcare will probably be one of the largest. Apart from being long, retirement costs a lot because of the risk we all face even when we are young, and that is inflation. Given enough time, inflation can turn a necessity into a luxury because of the increase in price. Take the case of ice cream. When I was young, ice cream was a favorite dessert at our home. I remember the times when this famous ice cream maker would launch flavors of the month and how families would make sure they served the latest ones. Now, with the cost of even a half gallon amounting to a small fortune, and perhaps also because we have too much sweets in our diet, we rarely buy ice cream. So if we think the cost of living now is too high, especially with the price of oil near US$100 per barrel, wait until we reach retirement. And by the time some of us 2

3 retire, oil would have probably become such a rare resource that prices would have gone through the roof. There are many sources of retirement income. Typically, we think of companysponsored retirement plans as the main source. We are a nation of time deposit-minded people. What this means is that we are more open to investments that have fixed features like an interest rate, guaranteed interest and principal, and a fixed maturity. The shorter the maturity, the more we like it. But even long maturities are OK for as long as the benefits are guaranteed. The Pinoy also relies heavily on pension and other benefits from the SSS (for private sector employees), the GSIS (for government workers) and the Home Development Mutual Fund or Pag-ibig (for both private and government sector employees). In reality, however, most of our retirement income will be provided by our own savings and investments, and not these external sources. If the returns on our savings and investments do not catch up with inflation, we will either end up with short funds for retirement or will have to invest a lot more to enjoy the good life in retirement. There are many, many investment outlets available in the Philippines. For those of us with sizeable funds to start with, enough expertise and time on our hands, we could set up our own business or invest directly in the capital markets. I call this the SET rule or S for size of funds, E for expertise and Time for time available for investing. For those with not that much money, not enough expertise and/or insufficient spare time, we could hire business or fund managers. In hiring fund managers, the easiest way is to buy into pooled funds, which have professional fund managers doing nothing but money management 24/7. Examples of such pooled funds are mutual funds, unit investment trust funds, variable unit-linked insurance and pre-need plans. Just remember the golden rule in investing: the higher the potential return, the higher the risk. In fact, risk is actually an acronym for Return Is Sometimes Killed. In planning for retirement, we must always cover the four management pillars of personal finance. These are CRDW, which stands for Consumption and Savings Management, Risk Management, Debt Management and Wealth 3

4 Management. In layman s terms, these simply refer to budgeting, insuring, borrowing and investing. All of these pillars will have a direct impact on the quality of life we eventually enjoy in retirement. We would need to budget wisely so that we will have enough funds to sock away for investing. Insuring protects our families from the risk of dying before we are able to build up the wealth that we want to pass on to our loved ones. In life, we start out with fewer funds. The way to accelerate spending and even investing is to leverage or borrow. Improper borrowing can lead to expensive interest and heavy mortgage payments that leave little room for enjoying life BEFORE and DURING retirement. Investing is the activity that will pole vault us into retirement as it makes the future more affordable. Investment returns allow for fewer financial sacrifices now to enjoy a brighter future. The trick is to know where to invest. The first thing to do in determining where we need to invest is to find out the future cost of our retirement. Once we know that figure, we simply compare it to the current level of funds for investment we have and our capacity to periodically add to our investments. The way to compare is to use time value of money or TVM. If we have Microsoft Excel, all we need to do is input the following formula in any cell: =rate(nper,pmt,pv,fv) where: nper = the number of years that you will invest our money prior to retirement pmt = the periodic amount of additional investments we will make pv = our current level of funds for investment fv = the future cost of our retirement Please note that the above computation does not factor in continually investing during retirement. It is likely that our future retirement funds will not be used up in the first year of retirement and that the balance will be reinvested all throughout retirement. Also, input pv and pmt as negative numbers as these will be cash outflows from our personal finances. The variable fv should 4

5 then be inputted as a positive number as it would be the cash inflow in the future, being the fruits of our investing labor. While we could input months, days or any other frequency for nper, just input number of years for simplicity s sake. So, if our future retirement will cost fifty million Pesos (P50,000,000) and we have one million Pesos (P1,000,000) now to invest and the capacity to add five hundred thousand Pesos (P500,000) every year for the next 20 years, our required investment return is thirteen percent (13%) per year, net. Our job now is to find an investment that can potentially pay 13% yearly, on a net basis, from now until the time we retire. Chances are, we will find an investment that can pay such a high rate of return, but not without the attendant risks. The way to mitigate these risks is to diversify our investment. Remember the old adage of not putting our eggs in one basket? That is diversification. Simply put, we must find investments that spread our investment risk. There are three major investment asset classes: cash equivalents (e.g. time deposits), bonds and stocks. We can diversify within or across asset classes. For stocks, we could buy several blue chip stocks with good earnings potentials. For bonds, we could invest in different bonds or in the same bonds like government securities but in differing maturities, the latter being diversification in tenor. For cash equivalents, we could invest in time deposits, special savings accounts and special deposit accounts with different institutions and with different tenors. We could even invest in a mix of stocks, bonds and cash equivalents. We could also diversify in terms of geography by investing not only in the Philippines but in other investment securities in other countries, the latest trend now being investing in developing countries like Brazil, Russia, India and China. While there are many forms of diversification, do remember that too much of a good thing does tend to become bad. Over diversification may lead to potentials returns in some assets being offset by the risks in others. How much to diversify will depend on the individual risk/return characteristics of the 5

6 securities we are looking, their effect on each other when they are put together in a portfolio and our capacity to monitor such diverse securities. As we can see, a lot of work is involved in retirement planning. Putting it off would not only be delaying the inevitable but also making it more costly. Let us adopt the 20/20 rule in retirement planning. This means that if we want to be in retirement for 20 years, we should start planning for retirement 20 years before our target retirement age. So, if we want to 20 year retirement period after retiring at the age of 60, we should start planning at the age of forty. The broader concept is that the length of retirement should roughly equal the length of preparation. Here s to a happy and healthy retirement. (Efren Ll. Cruz is registered financial planner with the RFPI USA. He is author of the bestselling book, Pwede Na! The Complete Pinoy Guide to Personal Finance and co-author of Pwede Na! The Complete Pinoy Guide to Retirement and Estate Planning. He is a Personal Finance Coach and the Chairman & President of Personal Finance Advisers Philippines Corporation. Questions about the article may be ed to [email protected], [email protected] or [email protected]. Efren may be reached at the same addresses for the scheduling of personal finance seminars.) 6

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