Fifty (plus) ages of gray
Question: Is 50 the ideal age to start preparing for retirement? What would be the good percentage of income to save and invest for retirement? Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook
Answer: There are many rules of thumb when it comes to retirement planning. One is the 20:20 rule which says that if you want to be in retirement for 20 years, you should plan for retirement 20 years before your retirement age. So, if you want to be in retirement for 20 years after the age of 60, you need to start preparing by the age of 40.
Intuitively, you can modify the rule to 15:15, 10:10 or even 5:5. The basic principle is that the period of retirement should be equal to the period of preparation prior to retirement age. A limitation of the 20:20 rule is that it does not take into consideration inflation and investment returns.
Another rule states that you should be earning at least 75 percent of your preretirement income during retirement for you to enjoy the same lifestyle prior to retiring. And if you are only earning 40 percent or less of your preretirement income, you will be in deep financial trouble.
The more practical way of preparing for retirement is to inflate the expenses of your future retirement lifestyle if you were to retire today. Then you have to derive the investment return you will need to earn to grow your starting funds and periodic additions to your retirement fund to meet such future inflated expenses.
Finally, you have to determine if the risks associated with the return that you need to earn are within your preference. If they are, well and good. If not, you will need to do some simulations on the current cost of retirement, length of retirement, period of investing, starting investment, periodic investments, the risk you are willing to take and the return you need to make.
There are other factors that are commonly forgotten in trying to make retirement lifestyle more affordable. One category is that of government-sponsored retirement and health benefits. Pension benefits from the Social Security System and the Government Service Insurance System can provide support for retirement living. There is also Philhealth, which can help defray the cost of long-term health care at a time of increased susceptibility to sickness.
Others assume that they will continue to work and earn even after retiring albeit at a reduced pace given their advanced age. That income in retirement maybe from a business, part-time employment, consultation work, and the like. The added benefit of continuing to work is that both the mind and body are kept in tip-top shape, which tends to promote longevity. People may be older and gray but they bear a lifetime of experience that still keep them in demand.
To sum up, there is no ideal age nor amount of savings and investments for starting retirement planning as it will be based on the plan you create given your unique circumstances. Please note that there is no financial product that is a retirement or pension plan. Your retirement plan is what you make it. Financial products are there to help you execute your plan.Stay safe and healthy. INQ
Efren Ll. Cruz is a registered financial planner of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books. Contact a Yaman coach for your financial planning needs. For details, email [email protected]. To learn more about personal financial planning, attend the 87th RFP Program this January 2021. To inquire, email [email protected] or text at 0917-.6248110
