The clear signs of aging

Question: What is the ideal age in which I should start focusing on retirement planning? I have heard people say that five years is good enough. I am quite young and still have my whole life ahead of me.—Fast-rising young executive.

Answer: Some say you should start preparing for retirement when you start to age.  What are the signs that you are aging? Here are some common symptoms:

The topic at your lunch table turns from magical vacations to medical prescriptions.

You find yourself searching for music compilations from yesteryears.

You start holding your cell phone farther from you just to read text messages.

You get very “high scores” in your lab results (i.e. high blood pressure, cholesterol, triglycerides).

Your moisturizer now includes anti-aging ingredients.

You begin your admonitions with, “In my time…”

You still watch the shows you grew up with like Hawaii “Five-0” and the Simpsons.

Seriously, we at the Personal Finance Advisers Philippines Corp. (PFA) find that the common practice among companies is to start preparing their employees for retirement just about five years before their retirement age. And when it comes to early retirement, the practice is to conduct personal finance programs as their employees leave. This practice runs counter to the 20/20 rule in personal finance.

The 20/20 rule says that if a person wants to be retired for 20 years, he or she should start preparing for retirement 20 years before retirement age. This means that if a person wants to be retired at the age of 60 and wants to enjoy retirement up to the ripe old age of 80, he or she should start preparing for retirement at the age of 40.

So which is it, five or 20 years before retirement?

There are actually a host of things that you should be preparing for financially. They are what we call life events and they range from getting married and raising a family to buying a home, sending children to college and retiring.

The typical strategy is to prepare for the life event that is closest.  But while this strategy makes perfect sense, it is not necessarily the best especially when it comes to preparing for the most expensive life event, that of retirement.

First off, retirement will probably last longer than what is commonly believed, thanks to the advances in medicine and technology. For example, scientists have already made huge advances in stem cell research using those stem cells found in your own bone marrow. This means that in a couple of years, you will just be a stem cell injection away from growing new organs to replace the failing ones in your body and without the risk of rejection.

Secondly, by simple math, the longer you have to save up for a need in the distant future, the more affordable it becomes. For example, if you needed to save P5 million for your retirement, simply saving the amount would require about P83,000 monthly for five years or P21,000 monthly over 20 years. If you are successful in earning an average of 10 percent per year on your investments, you would need to set aside only about P65,000 monthly for five years.

Now, try to invest your savings at the same 10 percent annual rate over 20 years and you would need to set aside only about P7,000 monthly, a big 68-percent discount on what you would have had to set aside by simply saving over the same 20-year period.

Investing over longer periods brings time on your side. That is why the earlier you prepare for a life event, the better. Now how much do you think would you need to set aside if you saved over 40 years or roughly when you start working? That would be a miniscule P800 a month.

Of course, the common argument is that retirement and pension plans of employers combined with state-mandated social security plans should be able to cover retirement. Bad news: they normally don’t. This is not to say that corporate retirement/pension and state-mandated social security plans don’t help. They actually do. But the bulk of retirement funding will still come from you. Time and again, we have shown this to participants as we compute for their future retirement needs in our training programs.

So the best advice is for you to start saving for your retirement as early as you can. This will allow you to provide for other life events at the same time. Welcome those agents who sell you retirement products even if you feel you still have your whole life ahead of you. They are actually helping you make your future more affordable. And if you find these products quite complex, e-mail us and we will be more than glad to sift through them with you for free.

If you want to know more about retirement planning and effective personal cash, debt, risk and wealth management, attend the EnRich training scheduled on Aug. 14, 2012. There are limited seats being given away to HR practitioners. Visit www.personalfinance.ph, e-mail [email protected] or call 2161541/3593094 for more details.

(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, investment adviser and author. Questions about the article may be sent by SMS to 0917-5050709 or e-mailed to [email protected]. To learn more about the RFP program, visit www.rfp.ph or e-mail [email protected].)