I want to go home
QUESTION: I have been working outside the Philippines for some years now. I am now 40 and thinking of returning to the country. Can you help me plan for this major life event?—OFW via Skype and e-mail
Answer: Who doesn’t want to come home? But perhaps this want and even need to come home is heightened when people reach mid-life. It is the time when we usually ask ourselves what we want to do for the rest of our life.
So, here’s one (frankly, not so easy) way to plan your one-way trip home. To simplify matters, let’s just limit the planning to your retirement with the following assumptions:
Annual cost to retire if you were to retire today = P300,000
Years before retirement = 10
Years in retirement = 20
Annual inflation rate = 5 percent
To get the future value of your retirement, first add the number “1” to the decimal equivalent of your assumed inflation rate.
Adding the number “1” to the decimal equivalent of 5 percent gives you the number 1.05.
Next, multiply 1.05 to the sum of your annual retirement expenses and you get P315,000. Multiply again by 1.05, but this time to the new product of P315,000 and you get P330,750.
Do this process as many times as the number of years you have left before you retire (10 years as assumed here) and you get a final product of P488,668.39. This means that from just P300,000 today, your annual retirement expense will grow to P488,668.39 after 10 years, assuming an inflation rate of 5 percent a year.
If you multiply the final product (P488,668.39) by the number of years you want to be in retirement, you will arrive at the equivalent future value (in year 1 of your retirement) of your total expenses throughout your retirement period.
So if you assume a 20-year retirement period, the equivalent total cost of your retirement, just on year 1 of your retirement, is roughly P9.8 million (20 x P488,668.39). Remember that you will still have to inflate that part of the P9.8 million that you will not be spending in the first year of retirement.
At this point, you are probably woozy, not just from the loss of blood from doing all of the computations but also from the enormity of the cost of retirement.
But don’t worry, all these can be made affordable by any or a combination of the following:
1. your starting investable funds;
2. the amount you can periodically add to your investments; and
3. any additional income in retirement, whether from a business or continued employment.
Again, to keep matters simple, let’s assume that you have P1 million in investable funds and that you can save P300,000 a year until your retirement age. This means that you can potentially build your wealth to P9.8 million if your investable funds and periodic savings can earn the equivalent of 14.5 percent a year for the next 10 years.
The question now is where you can possibly get a return of 14.5 percent a year. Product providers such as bankers, insurance agents, stock brokers and fixed income salespeople carry all types of financial securities you can buy to potentially achieve such a required return.
Do remember that you have yet to include any additional income that you may enjoy while in retirement. After all, you will just be 50 when you retire and will be very much fit to work or start a business. Any additional income will help lower your target return.
Also remember that you will have to do similar computations for other future large expenses such as your children’s education.
A financial planner can help present a more complete picture for you including the allocation of your funds as well as an objective assessment of available investment options.
He or she can also do simulations to show you options if you want to retire sooner or later. Such simulations can include accelerating your savings and/or reducing your costs.
If you want to learn more about personal financial planning, please visit www.personalfinance.ph. There are a lot more free resources there for you to benefit from.
You may also want to attend EnRich™ on May 25, 2013 (moved from May 18), our public training on personal finance.
One last thing, please remember that financial plans are mere starting points. There are many non-quantifiable factors, like being present to raise your children the way you see fit, that may carry more weight than all of the computations combined. That’s why you will need to see the totality of a financial plan, including its implications, before you fully embrace one.
See you soon in the Philippines.
(Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-5050709 or e-mailed to [email protected]. To learn more about financial planning, attend a FREE personal finance talk on June 6, 7 p.m. at the PSE Center. E-mail at [email protected] to register.)
