Is there life after SDA?

QUESTION: Is investing in retail treasury bonds or RTBs safe? We started considering this instrument after the Bangko Sentral ng Pilipinas (BSP) discouraged investing in special deposit accounts (SDAs). The regular time deposit rates are very low compared to the higher SDA rates that we have gotten used to. We do not want risky investments like stocks because my husband and I are already retired. We would appreciate your guidance on the matter.—Sent via “ask a friend, ask Efren” service on www.personalfinance.ph

Answer:   The problem of low interest rates on regular time deposits has been around for quite a number of years.  According to BSP data, short-term time deposit rates were at around 15 percent a year in 1981.  When SDAs were introduced, short-term time deposit rates were 8 percent a year while SDAs were going for more than 10 percent a year. And over the last decade, SDAs were better able to beat inflation than time deposits.

Today, banks would probably give a time deposit rate for 30-day placements of about 1 percent a year while the corresponding SDA rates are down to 2 percent a year.  As you mentioned, the BSP is now restricting the access of retail people to this seeming last bastion of hope for short-term placements.

But are there really no other choices?

Before we proceed, let’s dissect your concern.  You first asked if RTBs were safe.  In investing, there is no instrument that can fully guarantee return of principal, payment of interest and punctuality of payment of either principal or interest. Relative to other investment instruments, however, those being offered by the government can be considered the safest.

By their very name, RTBs are issued by the National Treasury. No less than the government is promising to pay interest and repay the principal on people’s investments. In SDAs, it is no less than the BSP that is issuing the guarantee. Compared to other investments and like SDAs, therefore, RTBs are among the safest.

You mentioned that you did not want to venture into high-risk investments like stocks because you are already retired.

I assume you just want to enjoy stable income all throughout your retirement and, if possible, leave some money to your children.

Let’s then do some pencil pushing. Let’s assume that you expect your retirement period to last for another 15 years and you want to be able to spend about P360,000 a year to cover your daily living expenses. Let’s further assume that you have P2 million in investable funds.

If you want to spend all your money and not leave any cash to your heirs, you will need to consistently earn 16 percent a year net of taxes.  If you want to leave the P2 million to your heirs, you simply have to consistently earn 18 percent a year net of taxes or P360,000 ÷ P2 million. Now even the stock market will be hard put to earn such consistent returns over a long period of time.  The stock market is capable of producing stellar returns as well as stellar losses.  What you need are stable returns.

One solution would be to shorten your retirement period.  If you and your husband decide to “be around” just for the next 10 years and not leave anything to your heirs, you would need to consistently earn slightly more than 12 percent a year net of taxes. This may be had, but again with no guarantees from an actively managed stock portfolio. Please note that you would still need to consistently earn 18 percent a year net of taxes if you wanted to leave the entire P2 million to your heirs, regardless of the length of your retirement period.  But we would rather err on the side of caution by assuming a longer retirement period.

Another solution is to reduce by one-third the amount of your daily living expenses. Assuming a 15-year retirement period and no money to be left for your heirs, you would need to consistently earn a little more than 8 percent a year net of taxes.  This can be achieved through an actively managed balanced portfolio or a combination of stocks and bonds (RTBs included).

At this point, you will have noticed that the best investment for you is determined largely by your financial goals which, in this case, is to support a simple life for a 15-year retirement period.  With the current low fixed interest rates, you will need to actively manage your investment.  And if you do not have the expertise to do so, professional fund managers (i.e. through banks, mutual funds, insurance companies, and soon exchange-traded funds) and investment advisers are available to help you.

To help determine the cost of your retirement, please download Ya!man™, the country’s first personal finance mobile app. The iOS and Android versions of Ya!man™ may be downloaded from the iTunes App store and Google Play, respectively. The app’s Symbian (40 or higher) OS may be downloaded from www.personalfinance.ph.  Ya!man™ also comes with a feature where you can ask clarifications from experts about financial planning. Everything with Ya!man™ is free,

If you want to learn more about personal finance for couples, please visit www.personalfinance.ph. There are more free resources there for you to benefit from. You may also attend EnRich™ Personal Finance for Couples on Oct. 26, 2013. Details for EnRich™ may be found on the website.

And yes, there is life after SDAs.

(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 the RFP program, attend a FREE orientation on Aug. 15, 7 p.m. at the PSE Center. E-mail at [email protected] to register or text <name><email><RFPinfo> at 0917-3464126.)