Things You Need to Know About Retirement

Recently, we have conducted an in-person event here in Singapore where we had a great audience consisting of overseas Filipino workers (OFWs).

Upon meeting these people, I was reminded of how OFWs around the world are considered the modern-day heroes as they endure sacrifices and work hard for their loved ones.

But as some of them dedicate their lives for their families, they sometimes forget to take care of themselves. That’s why in this latest article, we’ll cover one of the important things that OFWs must plan ahead, which is retirement.

Find out how you can navigate retirement planning so you can enjoy the fruits of your labor later on. With that, let’s start by defining what retirement is.

What is Retirement?

Retirement is the period of your life where you have stepped away from your active sources of income like your corporate job or your business. And the transition to it usually happens when a person reaches a certain age or when they already served a company for a specific number of years.

Ideally, retirement should be the point in time that you’ve reached your financial freedom. It’s the time that you can choose to do the things that you want to do without worrying so much about your finances. This is the type of retirement that I hope everybody will achieve.

Because it is possible. There are people who have achieved financial freedom earlier and I’ve even seen some who can do it in their 30s or 40s. But of course, there are a lot of different factors to consider. One of which is creating a plan for your retirement, so let’s discuss why it is important.

The Importance of Retirement Planning

Planning your retirement is essential because it really takes time to build a good retirement fund that would sustain your needs and the lifestyle that you want. It’s not gonna be overnight for somebody to save like a million dollars. And the first hundred thousand is probably the most difficult to build.

That’s why you have to take advantage of the power of compounding over time. Because with compounding, when your savings or your investment portfolio gets larger, it becomes easier to grow it more. So if you already have the means to do so, start early even if it’s just a small amount.

To illustrate, if you save a thousand dollars every month over a 30-year period, and it grows at a 6% rate, you’ll already get a million dollars. But if you’ve started late and only got 20 years to grow it, then you’ll only get half a million. That’s a huge difference for a 10-year gap.

So if you have a larger savings or have a bigger lump sum, then that means you can get a higher amount and you can accelerate reaching your retirement numbers faster.

Steps to Take When Planning Your Retirement

Now that we’ve covered the definition of retirement and the importance of planning it, here are the 4 simple steps you should take when preparing for your retirement.

1. Picture the goals that you want to achieve.
The way of how we want our retirement will be different from person to person, so we need to define what it means first and how much that lifestyle would be. What are your short, medium, long-term goals? Do you want to have local and international travels twice a year? Do you want to go out with your family or friends once a month? Or maybe try enrolling in classes every quarter? It’s totally up to you to decide.

And once you have an idea of its cost then you can work your way backwards. Identify how much money you need to save and the rate you need for it to grow and reach your numbers.

2. Understand when is the ideal time for you to retire.
We know that retirement planning is more for the long term, but we have to be specific and realistic. How long do you need to get to your retirement numbers? How long do you have before you reach your retirement age?

Sometimes, we want to achieve it earlier but our resources cannot get to that level at the timeframe that we originally wanted. So the secret sauce here is really about learning how to increase your cash flow overtime and invest it

3. Know your risk appetite.
You have to take into account 3 kinds of risk which are (1) the risk that you prefer to take, (2) the risk you need to take, and (3) the risk you’re capable of taking.

Do you have the resources to take the risk this investment offers? Can you hit your numbers when you take this investment with 4% interest and a low level of risk? The combination of these 3 risks will help you find a balance on what would be the best steps to take.

4. Include inflation in the computation.

A lot of people forget to include this so they’re quite surprised that they actually need a much higher number than what they think they should have. And that’s what we’re trying to avoid.

The ideal annual income for people varies depending on what kind of lifestyle they want. But what’s important is to adjust it based on what’s realistic for you.

Now to understand it better, we have to find out the retirement fund you need that will yield the monthly income that will sustain your needs and wants.

For example, you want to have PHP 200,000 per month, multiplied to 12 months is equal to PHP 2.4 million.

PHP 200,000 x 12 months = PHP 2.4 million a year

Let’s say that you’ll invest in an investment that grows at a 4% rate. If you divide PHP 2.4 million by 4% (or 0.04), you’ll get PHP 60 million. This means in order to earn PHP 200,000 a month, you have to invest PHP 60 million that grows at a 4% rate.

PHP 2.4 million / 4% = PHP 60 million

Then we need to factor in the number of years you have before you retire and the inflation rate as well. For example, you’re now 40 years old and you want to retire or achieve financial freedom at 50, so it means you have 10 years before retirement.

In general, the inflation rate in the Philippines is around 4 to 6% in the last 20 years. So for those who want to be more conservative, you can calculate at a 6% inflation rate. Those who want to be more aggressive can use 4% for the meantime. Or if you cannot decide yet, you can use 5% for the meantime.

Continuing with the example above, let’s use PHP 60 million and multiply it at a 4% inflation rate for 10 years. For a simpler calculation, this means multiplying PHP 60 million to 1.04 for ten times.

PHP 60 million x 1.04 x 1.04 x 1.04 x 1.04 x 1.04 x 1.04 x 1.04 x 1.04 x 1.04 x 1.04 = PHP 89 million

If you use a 6% rate and still for 10 years, this will result in PHP 107 million, while a 5% rate will result in PHP 98 million.

And so, this is how to identify the amount you might need for your retirement where you factored in the inflation rate and the number of years you have before you retire.

Conclusion

There are a lot of factors that affect these steps and that we have to consider, like your career or business trajectory, your capacity to increase your savings rate, and the financial instruments applicable for you. But the most important thing to do for retirement planning is to start.

You don’t have to get it right all the time, you just have to get it started. Learn along the way and make some adjustments as needed. Find ways to generate as much income and be reasonable with your expenses.

When it comes to your investments, it’s critical to be very disciplined and not to get affected by the financial markets in the news when they’re having a lot of volatility. Remember that the biggest risk to any investment portfolio is the investors themselves. Stick to the strategy that makes the most sense for you.

Do some research, attend seminars, or read some books. If you’re new to financial planning, don’t hesitate to ask for help. Listen to trusted mentors who can guide you if you have such people around you. Talk to a trusted and knowledgeable financial advisor that you may know. Maybe ask some of your friends who have good experience with their financial advisor and see if you might be suitable. And in any case that you haven’t found one yet, you can schedule a call with me here and I’d be more than glad to help.