Buy firm, divest indifference

QUESTION: How early should I start preparing for retirement? Please take note that I have other things to prepare for like buying a house, funding my children’s education up to college, buying a car perhaps every five years and so on.—Asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph and Facebook.

Answer: They say that if a frog were to jump mistakenly into a pot of boiling water, it would immediately jump out. But if a frog were to jump into a pot of lukewarm water it would stay inside even if you start to heat that pot. The frog will not notice the slow change in temperature right away until perhaps it is too late. This is actually a metaphor because modern day scientists have proven that frogs will jump out when the water becomes too hot.

What is true is that creeping change largely goes unnoticed.

Water that is slowly leaking from a faucet will generally be ignored. But that attitude will change if the leaking drops are collected in a glass overnight and more so when the water bill comes at the end of the month.

The growth of children will not be noticed until their mothers realize that their children’s clothes do not fit anymore.

This attitude to slow change is somewhat similar to the attitude toward loose change.

In a previous article titled “Take the P3.50 challenge,” I wrote that even a weird amount of change like P3.50 can amount to a lot when saved five days a week, four weeks a month and 12 months in a year. The total, which comes to P840, is more than four times larger than what P100,000 can earn in savings account for one year, net of tax.

There is this watch-your-car boy that I give P20 to every time I exit a drug store’s parking lot. That P20 may not amount too much for me. But with an easy 20 cars a day that he helps to maneuver through the drug store’s narrow parking lot, his income comes to P400 a day. He already makes nearly the minimum daily wage of P481 for Metro Manila. And this is on top of earnings from the fruit and candy stand he put up at the edge of the parking lot.

In both situations, both the loose change of P3.50 and P20 will not be given much value when looked at individually. The same is true for each drop of water leaking from a faucet and the millimeters and grams a child adds to his height and weight, respectively every day.

So why not put slow and loose change to good use for you.

Let’s assume that you are 35 years old and that you will retire at the age of 60. The 20:20 rule states that if you were to be retired for 20 years, you should start saving 20 years before your retirement age. That means that you should start saving up for retirement at the age of 40.

Therefore, for every P1 million that you want to have by the time you retire, you should be saving up around P137 per day. This figure seems more palatable than roughly P50,000 a year. If you wanted P2 million, just multiply P137 by 2 (i.e. P2 million ÷ P1 million). If you wanted P3 million, just multiply P137 by 3, so on and so forth.

However, the 20:20 rule does not take into consideration inflation and investment returns. With an inflation assumption of four percent per annum, you would now have to save around P300 per day per P1 million in today’s money. Again, the daily rate is more acceptable than P110,000 a year.

However, you probably would rather save only P137 per day and it is not that difficult. If you were to invest your money at slightly over 7 percent per year (i.e. daily compounding), you can still save P137 per day per P1 million in retirement money that you need (valued in today’s pesos). And since you are just 35 years old, you can even bring down the daily savings to just P107.

Retirement is something that people hardly consider when they are young. That is why I congratulate you for at least putting retirement planning within your radar this early in your life. But you have to be firm in investing to make retirement planning more affordable. And divest from the indifference that is commonly inspired by slow and loose change.

To learn more about retirement planning please visit www.personalfinance.ph. There are free tools there to help guide you. If you want to set up your own financial consultancy, join us at our Financial Planner’s Training program for the cities of Cagayan de Oro, Davao, Mandaluyong, Cebu and Baguio. Check our website for the details and on how you can potentially attend for free and even earn a fee.

Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions may be sent by SMS to 0917-505-0709 or e-mailed to [email protected]. To learn more about personal financial planning, attend tje 48th batch RFP program on July 11 to Aug 29. For details, inquire at [email protected] or text <name><email><RFP> at 0917-3464126.