Being prepared for retirement may not be at the top of your money goals right now, especially if you’re still young. Still, getting started as early as possible can make it easier to do, not to mention more affordable to accomplish.
When you’re thinking about investing to retire, answer these three questions first:
How much will you need?
Like any other financial goal, you’ll need a figure to aim for. Start with a number you think you will need to live comfortably for the rest of your life without having to work another day.
Here’s a simple formula: daily budget x 365 days x no. of years to retirement
For example: P1,000 x 365 days x 39 years = P14,235,000
Of course, this formula will need adjustments. You will likely need to add to this fund after considering things like:
- Marriage plans
- Budget for children (including education)
- Travel plans
- Capital for putting up a business
- Inheritance fund
- Inflation over time
Don’t be afraid to aim higher. The more you have, the more opportunities and the higher the level of comfort (assuming you don’t overspend) you’ll get.
How long will you have to get ready?
In general, the longer you have before your planned retirement, the easier it will be to reach that goal. Of course, the better you are able to manage the money that comes into your pocket and the money that goes out, the faster you can get there.
Here’s where saving and investing comes in. Saving is simply setting aside money for future use, while investing is the process of buying assets that will grow in value over time. You need both for a good future.
Young people generally can afford to take on investments with more risk for the possibility of a higher reward, precisely because they have a lot of time to go before retirement. For this reason, it is encouraged that investors with many years to go until retirement assume an aggressive investor profile.
People nearing retirement generally prefer to take on investments with less risk in exchange for more modest rewards. As the need for cash gets higher, the less risk one is willing to face. For this reason, it is encouraged that investors with a few years to go until retirement assume a conservative investor profile.
What are your investment options?
There are generally three types of investments: conservative, moderate, and aggressive.
Examples of conservative investments are time deposits and treasury bills. Government bonds and corporate fixed income securities are among the moderate investment options, while common and preferred shares of stock are examples of aggressive investments.
Investors have the option to invest in those three directly, course it through a vehicle, or assemble a well-diversified retirement fund portfolio over time with Conservative, Moderate and Aggressive vehicles.
Those vehicles may be a Unit Investment Trust Fund (UITF), mutual fund, or Variable Unit Life insurance fund (VUL), offered by banks, investment houses, and insurance companies, respectively.
While these can already help you build your retirement fund, there are some vehicles created specifically with retirement in mind. There are the public pension plans like the one that is linked to your monthly SSS (Social Security System) or GSIS (Government Service Insurance System) contributions.
The PESO (Personal Equity and Savings Option) fund of the SSS and the PERA (Personal Equity Retirement Account) are also meant to help you have money even when you retire. These are voluntary defined contribution or provident funds that give some flexibility in terms of how much and how often you put money in them.
Banks and insurance companies offer private pension plans, and/or retirement-focused insurance plans with an investment aspect as well. If you’re privately employed, your employer will likely have a retirement plan that you can take advantage of, too.
In summary, you may stick to one plan, or you can mix it up by employing several. As the saying goes, be stubborn with this retirement goal, but be flexible with your methods.
