Q: I AM AN OFW and I want to save money for my eventual retirement, but I don’t know where to start. I have set aside some savings from my salary in the bank but I don’t think my savings are growing enough to reach my goals. What should I do?—Regine Dela Peña by e-mail
A: Building a retirement fund entails more than just saving money in the bank. You need to grow your savings by investing regularly. When you invest, your savings will grow faster because of the returns that will accumulate over time. But building an investment portfolio for the long-term can be challenging because it requires you to carefully tailor fit your strategy to your risk profile and life goals.
Start your investment journey with a financial goal in mind.
Let’s say you have figured out that you will need around P20 million to support your financial needs when you retire beginning at 65 years old. Given this amount as your retirement fund, you need to know how much to invest now in order to achieve this goal.
The amount of investment will depend on how long you will be investing and the target returns that you desire. The younger you are, the lower the amount you need to invest and the higher the chances that you can achieve your goal. For example, if you are 25 years old, you will have 40 years to build your retirement fund. At target returns of 8 percent per year, the annual investment you need to contribute in order to achieve P20 million goal by 65 years old is P77,203, which translates to monthly savings of just P6,433.
If you are older at 35 years old, you will need more money to invest to achieve the P20 million goal. You will roughly double your budget because your time horizon is shorter. Your challenge will be to look for returns higher than 8 percent to keep your investment low. Perhaps, you may have to look for more aggressive, riskier investments to get higher returns.
If you are high earner and have large sum of savings, you can create an investment plan that will achieve multiple financial goals. This plan will not only cater your own retirement, but also educational plans as well as medical needs of your children and loved ones. Imagine if you can afford to invest of P500,000 annually, your projected nest egg by the time you retire can reach as much as P129 million.
Once you have settled with your investment plan, the next item you need to decide is the asset allocation. How much should you invest in stocks? Stocks are riskier investment but earn far more than fixed income or cash historically.
One way to determine your exposure to stocks objectively is to use the formula 120 minus your age. If you are 25 years old, your stocks exposure can be as much as 95 percent, but if you are 55 years old, your exposure should not be more than 65 percent. As you get older, it is advisable that you invest less in stocks and focus more on less risky investments such as fixed income.
When you invest in stocks, you can manage your risks by diversifying your investments to different types of stock such as blue chips, second-liners and small cap stocks. If you are looking for stability, choose blue chip stocks with predictable earnings and less volatility. Stocks such as PLDT, Meralco, BPI and SM Prime have compounded annual returns of not less than 10 percent in the past five years. These stocks can be your core holdings because they provide secured growth that will last, not to the mention the annual cash dividends that they give which help lower your investment costs over the years.
On top of your core holdings, you can consider other stocks that have historically high returns. Stocks such as Megaworld, Ayala Land and Metrobank have annual compounded returns of 25 percent for the last five years while Universal Robina, Aboitiz Equity Ventures, ICTSI and Jollibee have historical annual returns of at least 40 percent per year.
The stock market has compounded annual returns of 15 percent per year for the past years. This makes our target return of 8 percent used in this example look very conservative. It is possible that when you do your investment planning, you can also make several scenarios assuming your target returns can be as low as 4 percent and as high as 12 percent so you can estimate how much more or less savings you need to contribute to your fund.
Throughout your investment journey, there will always be opportunities for you to save more from higher income. You don’t have to stick to your monthly or annual investment contribution. If you can invest more, the better for you because this will help you cut down the number of years to achieve your investment goal, or increase the amount of the fund you originally projected for your retirement.
Creating a retirement fund may not be easy if you don’t have the skills to do it. It will be helpful if you can also consult an expert or a registered financial planner to assist you in developing your investment plan. In this way, you will also be guided and at the same time learn from it. Try not to outsource the job to other people. Always make an effort to learn and understand the process to build your confidence.
Henry Ong is a registered financial planner of RFP Philippines. To learn more retirement and investing, attend our FREE personal finance talk on Nov 5 at PSE Ortigas. To register, e-mail info@rfp.ph or text <name><e-mail> <RFP> at 0917-9689774.