Putting the gold in your golden years

Mantaring

When my father “retired”, he had built quite a nest egg, the result of years of frugal spending and investing his money wisely. He wanted to ensure that he and my mom would never have to be dependent on anyone and would be able to support themselves throughout their retirement years. He did continue to work as a consultant until he passed away, but it was primarily because he loved what he did and could not imagine spending his days idly at home.

That lesson was probably in my subconscious when I first drew up a plan in my early thirties, detailing how my husband and I could retire at 50. We weren’t aiming to actually quit working at 50, but we figured that if we missed our target we had 15 more years to get there.

We determined how much we would need to retire comfortably, then created a spreadsheet where I input our salaries and their projected growth through the years. I added expected expenses, both day-to-day and major ones (education, vacations, etc), assumptions on inflation rate, returns on any savings we would have. Basically, a simple cash flow projection.

It readily became apparent that there was no way we would be able to build up the retirement funds we needed if we kept our money in low-yielding vehicles such as time deposits. We needed to invest our funds in higher-yielding instruments. But because we had a young family and growing expenses, we could not be too aggressive. So I input a fairly conservative rate of return on money we thought we would be able to set aside.

When we built our house, we were wiped out. We were constantly scrambling to put funds together to pay our bills, so we were not able to set aside enough to follow our Retire@50 plan. We also did not have time to study where to invest, nor did we have the expertise and sufficient funds to do it well. It looked like our plan was in jeopardy.

That’s when we discovered mutual funds.

Mutual funds allowed us to invest our meager funds in different investment vehicles in which we would otherwise not have been able to invest. Bonds and equities require minimum amounts. Further, to effectively invest in the stock market, you need a significant amount of money to attain proper diversification, money which we did not have. Mutual funds allowed us to invest in funds which matched our risk appetite and rely on professional fund managers to manage our money.

As the years passed, we saw our income grow faster than we thought it would, but our expenses also grew faster than we thought they would. Fortunately, our investments also did better than we thought. As things changed, I updated my spreadsheet until it became apparent that we would be able to meet our Retire@50 objective.

Looking back, some of the lessons we learned were:

Before we even thought of the 20 or 30 years down the road of retirement, we had to pay attention to the NOW—ensuring our young family was sufficiently protected. We had insurance, but in hindsight, not nearly enough. As we saw some friends pass away early or suffer serious illnesses and saw the struggles their families went through, we realized how lucky we were that we were not among them. Protection means ensuring that you have sufficient funds in easy-to-access accounts for emergencies, but also ensuring that should something happen to you, your dependents would continue to have the money you provided to support them.

Buying a house or condominium unit for a home is not really an investment but an expense. Everyone dreams of having their own house, and rightly so, but bear in mind that after buying one you will continue to bear significant expenses like real estate taxes and maintenance costs. Don’t count it as an investment asset unless you intend to rent it out, or you intend to sell it or “flip” it as some people would say.

It is very difficult to predict what will happen. Building our house wiped us out, but cost of materials and housing prices escalated rapidly after that. If we had waited longer, we may not have been able to afford the same house. It is also difficult to determine how the market will move. I can’t count the times I tried to time the market, holding on to cash because I thought it would continue to go down only to see it reverse and move up rapidly, or putting in cash thinking it would go up further only to see it crash. Even seasoned fund managers would tell you that if they could predict market movements perfectly they would have amassed huge fortunes by now. To be able to build your nest egg, it is important to have the discipline to stick to your financial plan. Every month, I paid for insurance, pension plans, and invested a fixed amount through salary deduction. This had the added benefit of peso cost averaging, where I could buy more shares at a lower cost when the market was down and less at higher costs when it was up. Over time, this proved effective in growing our funds.

As you start to earn more, it becomes very tempting to spend more—buy a new TV, new car, travel to exotic places, etc. One question we would always ask ourselves was, do we really need this? For example, for years we shared our single TV with everyone in the house, and often kept appliances until they broke down. Unfortunately, these days I’ve seen people not only spend all their earnings but spend even what they don’t have, borrowing money for things such as vacations and the latest cell phones. Habits tend to become baked in, and spending habits form a pattern that becomes very difficult to change. Learning to spend, save and invest wisely while young often sets the foundation for financial security in your later years.

Match your savings and investments with your future expenses. My husband and I were fortunate to have obtained graduate degrees overseas on scholarships and assistantships. We naturally dreamed that our kids could do the same. While chatting with our chief investment officer one day long ago, I happened to mention that and he said, “You’d better set aside money in dollars.” It didn’t seem to make sense to me then as dollar funds earned very low returns. Fortunately we followed his advice, as we saw the rapid depreciation of the peso in the years that followed.

People often say they don’t earn enough to set aside money for the future. You’d be surprised, however, at how even small amounts set aside regularly can build quite a nest egg for you. With proper planning and disciplined execution, you CAN put the gold in your golden years. —CONTRIBUTED