Posts
By Dr. Johnny Noet Ravalo
INQUIRER.net
My father just got out of the Intensive Care Unit. Throughout his confinement, he was constantly asking about the balance on his bills. We tried to dance around the issue. Finally, he stopped asking after assuring himself that he had his Social Security System pension to rely on.
His comment made me wonder. My father’s pension is only slightly more than P4,000 a month after working all his life. This amount covers less than a week of his maintenance medication. We are not even talking here of having a caregiver or of the costs of being confined at a hospital. If new medicines are prescribed after his confinement, there is a very good chance that his medicine needs will only increase.
The financial demands of long-term health care is just one of the reasons why you should begin to ask how this on-going global crisis affects your projected retirement plans.
Financial markets have seen a general decline in interest rates. How does this lower-interest rate environment impact investors, specifically retirement plans?
Retirement plans are particularly vulnerable to low interest rates. Lower yields will translate to lower expected returns over time. It is simply unrealistic to expect the same returns now as the returns you enjoyed 12 to 18 months ago. What the crisis has done, among others, is alter financial projections.
The difficulty then is two-fold. First, there may be a real need to scale down our longer-term financial plans. If your target was to earn 6 percent over 25 years, your initial P100 will eventually become P429.18. If you get 6 percent for 20 years but only get 1 percent for five years, the nest egg shrinks to P337.07. That is a 22 percent drop in the retirement fund as a result of five bad investing years despite 20 good years.
Second, there may be the temptation to compensate by going for more complex, higher risk instruments. That would not be prudent and is probably one of the reasons why the international market is where it is today.
Of course there are other factors involved. A P4,000-a-month pension is not enough to meet my father’s needs in the first place and having to adjust further does not leave much room. The option though is to live as if the original retirement plan will be sufficient and without the reality check now, get the shock of your life when you find that it won’t be enough.
Sunday, November 1, 2009
Saturday, October 31, 2009
Dangerous thoughts on retirement: ‘Better late than never’
By Dr. Johnny Noet Ravalo
INQUIRER.net
We all get pre-occupied by the rat race. Surely taking a few years off wouldn't hurt my retirement plan. Or would it?
Anyone who wants to retire well needs to ask himself (1) how long do I expect to live and (2) how much time do I have before I retire?
The last thing we want is to run out of resources after we retire. We would rather bequeath what we have left rather than ask our children to feed us. That’s why the planning horizon is important. We need time to prepare.
Figure 1 in the gallery shows what happens when we have set aside P100,000 (for the lump-sum, just-in-case expenses) and then we add P50,000 each year to our retirement fund. Let’s assume that it generates a return of 5.0 percent per year.
Getting one's first full-time job at 21 to 22 years old, a young worker usually needs a few years to get “settled” (complete change of wardrobe, treating the immediate family, spending on “tools” that make us look more professional). This transition is normally done by 25 years old, which leaves 30 years before retirement.
Using the assumed parameters, the potential retirement kitty will come out to P3.92 million. This figure is not etched in stone as many things can and do change. Rather than get caught up in the accuracy of an absolute number, I find it more useful to think in “relative terms”.
Now, what happens if we take a few years off from the 30-year plan? After all, 30 years is a very long period and surely some time off wouldn't hurt. Or would it?
Five years off from the 30-year planning horizon - that's 16 percent if you're counting - makes us lose more than 25 percent of the full potential value of our retirement kitty. And if we take a third off the planning timeline, we lose almost half of the potential value! (See Figure 1 in the gallery).
There is a world of difference between starting to plan for retirement at 25 years old versus starting at 40. Roughly two out of every three pesos that could have been generated is lost just because we start later than sooner.
Is the gap permanent? Absolutely not. Can we retire then in five or 10 years if we only start to prepare our retirement kitty now? Not exactly.
The same graph shows that catching up is increasingly difficult the more we delay. If we only allow five years of pension contribution, we would have lost 89 percent of what the fund could have been. For a vesting period that short, the problem becomes more absolute than relative: five years is too short to have enough in a retirement fund irrespective of any consideration of foregone opportunities.
The only cure for a short vesting period is either to invest more or generate much higher returns.
Going back to the numbers, we need to invest roughly P163,850 annually for 15 years to get a retirement kitty of P3.92 million. This is over three times my initial target of P50,000 annually and all because I gave up half of my planning horizon. If I started even later, I would need P284,500 a year for 10 years or P654,000 annually for five years.
Since most of us do not have the luxury of this much saving, the harsh reality is that beyond a certain point there isn't enough time to prepare for retirement because the demands on saving and reinvestment would be too great.
How about generating better returns? We all know that higher returns mean a bigger retirement kitty. We probably also know that higher annual rates of return increase the amount of the retirement fund at an increasing rate (See Figure 2). The more interesting question though is whether higher returns can make up for a shorter vesting period.
The answer is in Figure 3. For a 10-year horizon, we need a return of 29 percent per year while a 5-year horizon requires an annual rate of return of 80 percent to match the 30-year planning period. I simply cannot think of any legal - never mind, prudent - means to earn this much from an investment.
To lower the threshold return, we need to raise the annual amount we set aside for retirement. The impact of that is in Figure 4. Despite increasing the amount set aside for retirement five-fold, 36 percent per annum for five years just isn't doable. This is already a quarter of a million pesos annually and the numbers still don't work out. Remember that I have not even talked about the risk-return trade-off.
INQUIRER.net
We all get pre-occupied by the rat race. Surely taking a few years off wouldn't hurt my retirement plan. Or would it?
Anyone who wants to retire well needs to ask himself (1) how long do I expect to live and (2) how much time do I have before I retire?
The last thing we want is to run out of resources after we retire. We would rather bequeath what we have left rather than ask our children to feed us. That’s why the planning horizon is important. We need time to prepare.
Figure 1 in the gallery shows what happens when we have set aside P100,000 (for the lump-sum, just-in-case expenses) and then we add P50,000 each year to our retirement fund. Let’s assume that it generates a return of 5.0 percent per year.
Getting one's first full-time job at 21 to 22 years old, a young worker usually needs a few years to get “settled” (complete change of wardrobe, treating the immediate family, spending on “tools” that make us look more professional). This transition is normally done by 25 years old, which leaves 30 years before retirement.
Using the assumed parameters, the potential retirement kitty will come out to P3.92 million. This figure is not etched in stone as many things can and do change. Rather than get caught up in the accuracy of an absolute number, I find it more useful to think in “relative terms”.
Now, what happens if we take a few years off from the 30-year plan? After all, 30 years is a very long period and surely some time off wouldn't hurt. Or would it?
Five years off from the 30-year planning horizon - that's 16 percent if you're counting - makes us lose more than 25 percent of the full potential value of our retirement kitty. And if we take a third off the planning timeline, we lose almost half of the potential value! (See Figure 1 in the gallery).
There is a world of difference between starting to plan for retirement at 25 years old versus starting at 40. Roughly two out of every three pesos that could have been generated is lost just because we start later than sooner.
Is the gap permanent? Absolutely not. Can we retire then in five or 10 years if we only start to prepare our retirement kitty now? Not exactly.
The same graph shows that catching up is increasingly difficult the more we delay. If we only allow five years of pension contribution, we would have lost 89 percent of what the fund could have been. For a vesting period that short, the problem becomes more absolute than relative: five years is too short to have enough in a retirement fund irrespective of any consideration of foregone opportunities.
The only cure for a short vesting period is either to invest more or generate much higher returns.
Going back to the numbers, we need to invest roughly P163,850 annually for 15 years to get a retirement kitty of P3.92 million. This is over three times my initial target of P50,000 annually and all because I gave up half of my planning horizon. If I started even later, I would need P284,500 a year for 10 years or P654,000 annually for five years.
Since most of us do not have the luxury of this much saving, the harsh reality is that beyond a certain point there isn't enough time to prepare for retirement because the demands on saving and reinvestment would be too great.
How about generating better returns? We all know that higher returns mean a bigger retirement kitty. We probably also know that higher annual rates of return increase the amount of the retirement fund at an increasing rate (See Figure 2). The more interesting question though is whether higher returns can make up for a shorter vesting period.
The answer is in Figure 3. For a 10-year horizon, we need a return of 29 percent per year while a 5-year horizon requires an annual rate of return of 80 percent to match the 30-year planning period. I simply cannot think of any legal - never mind, prudent - means to earn this much from an investment.
To lower the threshold return, we need to raise the annual amount we set aside for retirement. The impact of that is in Figure 4. Despite increasing the amount set aside for retirement five-fold, 36 percent per annum for five years just isn't doable. This is already a quarter of a million pesos annually and the numbers still don't work out. Remember that I have not even talked about the risk-return trade-off.
Tuesday, August 25, 2009
US, European firms eye RP retirement industry
By Abigail L. Ho
Philippine Daily Inquirer
First Posted 21:47:00 08/25/2009
MANILA, Philippines - Companies from the United States and Europe are looking at investing in the country’s retirement sector, with plans already on the table to set up “continuing care facilities” for retirees.
In an interview yesterday, Philippine Retirement Authority (PRA) acting general manager Reynaldo Lingat said an American firm was looking for idle lands in Clark Field, Pampanga, and even beyond, including Subic Bay Freeport in Zambales to Morong in Bataan.
The land would be used to house continuing care facilities for retirees, he said.
These facilities will include a whole package of products and services that retirees can avail themselves of, including housing, healthcare and lifestyle facilities.
A European company, Lingat said, was also planning to put up facilities for retirees, particularly those in the “assisted” and “nursing” sectors.
According to him, retirees can be divided into three categories: active, 35-49 years old; assisted, 50-65 years old, and nursing, 65 years old and above.
“We should be targeting the assisted and nursing sectors. We have to have the facilities that can accommodate them. We need investments, either from the retirees themselves or from other investors,” he said. “Once (these facilities) are established, there will surely be a domino effect.”
He said a Korean group was also looking at developing some retirement facilities on parcels of land along the Subic-Clark-Tarlac Expressway (SCTEx).
“Investments (in the retirement sector) are increasing this year, at least based on the number of inquiries that we have received in our office,” he said.
PRA accreditation specialist Bing Aquino said there were currently 85 PRA-accredited institutions in the country.
Of these, however, only eight were targeted at the elderly, she said. The others were mostly in the real estate and resorts sectors.
PRA chair Edgar Aglipay said about 20,000 retirees enrolled in its program, 30 percent of whom were Chinese, 20 percent Japanese, and 10 percent Koreans. For 2009, he said PRA was targeting to have another 4,000 enrolled retirees.
Philippine Daily Inquirer
First Posted 21:47:00 08/25/2009
MANILA, Philippines - Companies from the United States and Europe are looking at investing in the country’s retirement sector, with plans already on the table to set up “continuing care facilities” for retirees.
In an interview yesterday, Philippine Retirement Authority (PRA) acting general manager Reynaldo Lingat said an American firm was looking for idle lands in Clark Field, Pampanga, and even beyond, including Subic Bay Freeport in Zambales to Morong in Bataan.
The land would be used to house continuing care facilities for retirees, he said.
These facilities will include a whole package of products and services that retirees can avail themselves of, including housing, healthcare and lifestyle facilities.
A European company, Lingat said, was also planning to put up facilities for retirees, particularly those in the “assisted” and “nursing” sectors.
According to him, retirees can be divided into three categories: active, 35-49 years old; assisted, 50-65 years old, and nursing, 65 years old and above.
“We should be targeting the assisted and nursing sectors. We have to have the facilities that can accommodate them. We need investments, either from the retirees themselves or from other investors,” he said. “Once (these facilities) are established, there will surely be a domino effect.”
He said a Korean group was also looking at developing some retirement facilities on parcels of land along the Subic-Clark-Tarlac Expressway (SCTEx).
“Investments (in the retirement sector) are increasing this year, at least based on the number of inquiries that we have received in our office,” he said.
PRA accreditation specialist Bing Aquino said there were currently 85 PRA-accredited institutions in the country.
Of these, however, only eight were targeted at the elderly, she said. The others were mostly in the real estate and resorts sectors.
PRA chair Edgar Aglipay said about 20,000 retirees enrolled in its program, 30 percent of whom were Chinese, 20 percent Japanese, and 10 percent Koreans. For 2009, he said PRA was targeting to have another 4,000 enrolled retirees.
Retirement is inevitable
It is really a pity when people of means, still young and able, suddenly faces a blank wall at the time of their mature lives. Somehow you cannot fully blame them all. They have to know what to do, they have to learn from their mistakes and be aware that if there is no savings, there is no investments, and if there is no investments there is no future for them.
With these in mind, we will try to share whatever knowledge we get in whatever source we can...........
Aim to retire with no debts
Q: After working hard in the corporate world for more than 30 years, I am looking forward to retiring at an early age, 55, so I can relax. I am in the retail industry, and sometimes work would include weekends over the years. I want to have more time for my family and myself when I retire – and that's about 10 years from now. What are the things I should prepare and aim for in time for my retirement? – Gloria
A: Retirement is a wonderful time. Indeed, after working for most of your life, you can look forward to a time that is more laid-back, when you can do what you want provided you have the means to do so.
That's the key to having an enjoyable retirement: having a nest egg that is enough to meet your needs for the lifestyle you want.
Have you figured out how much you will need to have at retirement? In a nutshell, it may be the amount you spend today, minus bills for your children's education and home mortgage, adjusted for inflation.
That is assuming you have some added protection already in place such as health and hospitalization insurance.
Otherwise, you have to add the cost of health care too, which may become more expensive as one grows older.
And because you will have no active income coming in at retirement, there's one other important thing you need to do: Wipe out those debts in time for retirement.
Aim to retire debt-free. It will free you up from worrying where to get the money to pay your debts. You will also have more money to use for your day-to-day needs.
From now until the time you retire, do these simple steps to debt reduction:
1. List down all your debts. These include car loan, housing loan, even credit card debts and personal loans from family and friends.
2. Make a payment plan. See how many years you have to pay off your loans. If one loan will take more than 10 years (your planned retirement schedule), talk to your creditor and ask if they can give better payment terms for a shorter payment period.
3. Prioritize paying off the debt with the highest interest. Then pay off the next debts on your list, until they all become zero.
4. Avoid incurring new debt while paying off existing debts.
5. Pare down your current expenses and use freed up money for debt payment. Look at your spending and see which expenses are not really necessary or can be foregone.
6. Look for ways to raise more cash and use the money to pay debts. Sell your unused stuff on the Internet – your “garbage” may be someone else's treasure, as they say. Find a sideline you enjoy doing and which you can do even with a hectic job (examples: selling, baking).
7. Stay committed to paying off all your debt. It may take years, but attaining your goal of going into retirement debt-free is worth it.
8. Continue to save for retirement. Once you have paid off all your debts (or even while doing so), set aside money to add to your retirement nest egg. It may mean you'll need to live simply to achieve that, but the returns – both financial and emotional –will be good for you.
On another note, although you want to retire from corporate life early, you might want to consider not retiring from work altogether.
Given that man's life span is longer now than it used to be, there is a possibility you might live up to 80 or beyond – that's an additional 25 years from your retirement age.
Would your retirement fund be enough to sustain your lifestyle for 25 years or more? Working, even part-time, may help you live to the fullest in your sunset years.
It will also keep your mind sharp. Aside from that, you will be helping other people by sharing your knowledge and skills in the workplace. Think about it. If you retire debt-free, working will be more a joy than a necessity. We wish you the best!
*Disclaimer: Readers are solely responsible for their own investment decisions and should thus conduct their own research and due diligence and obtain professional advice. INQUIRER.net will not be liable for any loss or damage caused by a reader's reliance on information obtained from our web site. INQUIRER.net receives no compensation of any kind from companies or industries or funds that are mentioned here.
With these in mind, we will try to share whatever knowledge we get in whatever source we can...........
Aim to retire with no debts
Q: After working hard in the corporate world for more than 30 years, I am looking forward to retiring at an early age, 55, so I can relax. I am in the retail industry, and sometimes work would include weekends over the years. I want to have more time for my family and myself when I retire – and that's about 10 years from now. What are the things I should prepare and aim for in time for my retirement? – Gloria
A: Retirement is a wonderful time. Indeed, after working for most of your life, you can look forward to a time that is more laid-back, when you can do what you want provided you have the means to do so.
That's the key to having an enjoyable retirement: having a nest egg that is enough to meet your needs for the lifestyle you want.
Have you figured out how much you will need to have at retirement? In a nutshell, it may be the amount you spend today, minus bills for your children's education and home mortgage, adjusted for inflation.
That is assuming you have some added protection already in place such as health and hospitalization insurance.
Otherwise, you have to add the cost of health care too, which may become more expensive as one grows older.
And because you will have no active income coming in at retirement, there's one other important thing you need to do: Wipe out those debts in time for retirement.
Aim to retire debt-free. It will free you up from worrying where to get the money to pay your debts. You will also have more money to use for your day-to-day needs.
From now until the time you retire, do these simple steps to debt reduction:
1. List down all your debts. These include car loan, housing loan, even credit card debts and personal loans from family and friends.
2. Make a payment plan. See how many years you have to pay off your loans. If one loan will take more than 10 years (your planned retirement schedule), talk to your creditor and ask if they can give better payment terms for a shorter payment period.
3. Prioritize paying off the debt with the highest interest. Then pay off the next debts on your list, until they all become zero.
4. Avoid incurring new debt while paying off existing debts.
5. Pare down your current expenses and use freed up money for debt payment. Look at your spending and see which expenses are not really necessary or can be foregone.
6. Look for ways to raise more cash and use the money to pay debts. Sell your unused stuff on the Internet – your “garbage” may be someone else's treasure, as they say. Find a sideline you enjoy doing and which you can do even with a hectic job (examples: selling, baking).
7. Stay committed to paying off all your debt. It may take years, but attaining your goal of going into retirement debt-free is worth it.
8. Continue to save for retirement. Once you have paid off all your debts (or even while doing so), set aside money to add to your retirement nest egg. It may mean you'll need to live simply to achieve that, but the returns – both financial and emotional –will be good for you.
On another note, although you want to retire from corporate life early, you might want to consider not retiring from work altogether.
Given that man's life span is longer now than it used to be, there is a possibility you might live up to 80 or beyond – that's an additional 25 years from your retirement age.
Would your retirement fund be enough to sustain your lifestyle for 25 years or more? Working, even part-time, may help you live to the fullest in your sunset years.
It will also keep your mind sharp. Aside from that, you will be helping other people by sharing your knowledge and skills in the workplace. Think about it. If you retire debt-free, working will be more a joy than a necessity. We wish you the best!
*Disclaimer: Readers are solely responsible for their own investment decisions and should thus conduct their own research and due diligence and obtain professional advice. INQUIRER.net will not be liable for any loss or damage caused by a reader's reliance on information obtained from our web site. INQUIRER.net receives no compensation of any kind from companies or industries or funds that are mentioned here.
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