Question: I am already past mid-life (i.e. 45 years old). I am at a point where my children are close to finishing school and I am about to shift to preparing for my spouse’s and my retirement. I am the lone breadwinner of my family as an employee of a firm based in Metro Manila. Admittedly, funding my children’s education was draining to say the least because we worked hard to provide them with the best education we could afford for them. I would like to rest from saving and investing a bit after my children graduate and then resume maybe two years later. To complete the picture, I will be done with my kids’ education when I reach 54, and I will have around P2 million in a combination of cash and investments. I want my spouse and I to retire and live on P50,000 a month in today’s money. Do you think I can afford to implement my plan or will I have to still slave away at saving and investing until I retire at the age of 60?–Asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph and Facebook
Answer: Congratulations on your achievements. It is no small feat to send children to school, much less to have P2 million left over.
Turning to your question, we will need to add some assumptions. Let us say that you will indeed take a break from saving for two years after your children graduate. But I would not advise that your money take a break as well. Perhaps what you could do is use the cash flow that you would be saving from not sending your kids to school anymore for leisurely activities like travel during your two-year hiatus.
We need to also assume an inflation rate for the cost of retirement living that you mentioned. For now, let’s assume a long-term top line inflation rate of 4 percent a year. And let’s assume that you and your spouse will be retired for a good 20 years.
Based on what we have so far, our company’s retirement calculator shows that you will need to earn over 25 percent a year in net returns for you to meet your retirement goals. Unfortunately, such a return can be earned on a consistent basis over the long-term only from a business. More importantly, you are nearing that stage in life when you want to be more conservative with your money. Setting up your own business now would also not be in the cards for you given your looming change in risk profile.
If we simply assume that you will be comfortable with a net return of 10 percent a year, when you are 50 years old and older, you will have to reduce your target lifestyle to just over P12,000 a month.
But let’s assume that we keep your 10 percent a year net return and we stick to your target retirement lifestyle of P50,000 a month. In this case, you will need to have additions to your retirement fund of under P393,000 a year from now up to age 53, pausing for two years and then continuing on from age 56 to your retirement age for you to meet your goals. This is clearly an enormous amount to save and invest per year.
All is not lost. You can still enjoy a good retirement. But you will have to make two critical assumptions that I cannot make for you “off the cuff.” One is that you will have to provide your expected lump sum retirement pay from your employer.
The other major assumption is your income in retirement. People will normally not stop working in retirement. Work is the elixir that keeps man young and healthy. So in this regard, you will need to make an assumption on what you can still earn in retirement. The amount need not and cannot be high because you are likely to take it slow in retirement.
These last two assumptions can help reduce what you need to periodically add to your investments, given your schedule of saving and investing, and afford you with the ideal lifestyle in retirement that you deserve. They will determine whether you will just ease on down towards retirement or you will still have to financially “avenge” through accelerated saving and investing for the trade-off decision you made of funding your children’s expensive education first.
If you want to learn more about retirement planning, please visit www.personalfinance.ph. The free tools there will help guide you towards a healthy, prosperous and long retirement. You may also wish to attend our Financial Planner’s Training program for the cities of Davao, Mandaluyong, Cebu and Baguio. Check our website for the details and on how you can potentially attend for free.
(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-505-0709 or e-mailed to efren@personalfinance.ph. To learn more about financial planning and how to become RFP, attend our free personal finance talk on May 14 at PSE Ortigas. To reserve, e-mail at info@rfp.ph or text <name><email><RFPinfo> at 0917-3464126.)