How to Save for Retirement in the Philippines?
November 23, 2021
Retirement is something many people look forward to, but saving for retirement should begin long before you actually retire, at least if you want to do it comfortably. You hear so many stories about people who have nothing to do after retirement and get bored which is honestly a good thing, being comfortable enough to be bored is a lot better than struggling with money at an age where working isn’t really an option again. There are several ways to get your retirement fund started, but the following will help you plan for one that works for you.
Setting goals is important when trying to achieve anything, it allows you to accurately map out how you’re going to reach them and this allows you to see how realistic they are, given your circumstances. The goal you’re setting yourself is a specific amount of money depending on the lifestyle you live along with several dynamic variables. This is obviously going to be different for everyone, some people want to travel around the world after they retire, some people just want to finally be able to relax at home and do nothing, again it all depends on what you want to do.
The first step to this is to find out your expenses every month, this includes rent if you don’t own the house, electricity, water, internet, etc. Once you have this number, you want to calculate how much you’d need for at least 10 years, further planning than this will require more money but will allow you to live comfortably without work for much longer and comes with the added benefit of having more disposable money in the event you want to treat yourself. If you find out later down the road that your interests change, just calculate everything again, only a couple of numbers should change, and having the base cost written down will make editing it substantially easier.
After all the work is done, just divide the total amount you’d need by the time you retire by how many months you have until you retire, this gives you the amount you’d need to save each month. As a safe bet, just round up to the nearest whole number for extra money.
No Better Time Than Now
In the words of Zack De La Rocha, “what better place than here, what better time than now?” Of course, the best time to save is as early as when you start to work, but unless you have a time machine, your next best bet is to start saving today.
According to Central Bank, “the difference between totals saved in your paycheck starting at age 25, versus 35 is stunning.” The New York Times published an article with a graph with the difference between investing at 22 vs 32 and the difference is close to double. While the difference may be large, it doesn’t mean you can’t start saving once you’re in your 30’s. It simply means you would have less than someone making the exact same investments as you. No matter who you are, if you don’t have savings yet, you should start as soon as possible, unless of course, you’re banking on having a kid who’s going to be rich and famous when they grow up or win the lottery, but good luck with that.
Making Saving A Habit
As hard as it is to save, it’s necessary if you don’t want financial problems once you’re too old to work. To avoid those problems you need to learn to save early on in life, or in some cases just earlier than your retirement. One strategy to get better at saving ties back to setting goals, but specifically SMART goals.
SMART is an acronym that stands for specific, measurable, attainable, relevant, and time-based/bound. Turn generalized financial goals into SMART financial goals. So something like “I want to save a lot of money,” turns into, “I want to save 100,000 in a year’s time, so I’ll put 10,000 in a savings account at the start of the month for 10 months.” This example is specific enough as there is a deadline and exact values, it’s a measurable goal based on both time frame and quantity needed, the goal is attainable (in this example), relevant in the sense that the goal is realistic, and it’s given a specific period of time to be completed. If you do this frequently enough, you would have made some money and created the habit of saving.
On the same page as saving, it is equally important to cut expenses where you can. I’m not going to go over things like, not eating out, buying off-brands, or anything of the sort, more of the idea of just spending less. The idea seems simple at first, just spend less, crazy concept I know, but the best way to do this is to keep your expenses lower than your salary minus necessary costs (bills).
Cutting how much you spend each paycheck is a lot harder for people than you’d think. I’d actually bet money, and call it an investment, that you know at least 1 person who either always borrows money or instantly starts shopping once payday comes. If you’re engrossed with the consumer culture or just find retail therapy too enticing, you may require outside help, as impulsive buying isn’t healthy and will lead to financial problems later on in life.
An easy trick to help cut down how much you’re spending is to add your savings to the same group as your bills. This effectively cuts down how much money you are able to spend once you transfer it to your preferred method of savings, whether it be a savings account, retirement plan, etc.
Many companies will offer some sort of retirement fund. In fact, Republic Act 7641, also known as the Retirement Pay Law, “entitles retiring employees to a retirement pay equivalent to at least one-half month salary for every year of service, which is given to employees by their employer after at least 5 years of service and reached at least 60 years old.” In addition or as an alternative to this, you can also set up your retirement plan outside of the one you’re provided at work. Make sure to do your own research about the following topics to find out which is right for you and your lifestyle as these are just brief overviews in order to bring awareness.
Pension plans like the Social Security System (SSS) give you monthly allowances or a whole lump sum amounting to your total contributions. You should have an SSS account if you worked a tax-paying job as your deductions include SSS. For other pension-style plans, contact banks or insurance companies and inquire. Other financial institutes will also offer plans with varying terms and conditions, just finding the one that’s right for you is the key.
The Personal Equity Retirement Account (PERA) is the Philippines equivalent to a 401k or Roth IRA account. You avail of this service through banks or insurance companies, although not every single place will offer it. It is a plan that allows you to invest your money into various investment options, what this translates to is, you can invest in different things with different return rates based on their risk, essentially think of stocks and bonds but you don’t have to watch them so closely. You will however still need to do research on what to invest in, so go into this with prior knowledge instead of randomly picking things based on their expected return rate. You can invest up to 100,000 PHP a year and receive a 5% annual tax credit, tax-exempt employer contributions, tax exemption for investment earnings, tax-free withdrawals after you hit the age of 55 with at least 5 years worth of contributions, and finally protection against creditors. Do note that if you go over the 100,000 PHP number in a year, any excess does not receive the tax exemptions.
Other financial funds such as bonds, stocks, and crypto are all great options for investors who want a more hands-on approach. Unlike the previously mentioned PERA, you will need to watch these yourself as the market can change at any time, especially for cryptocurrency. The risk associated with these can be somewhat mitigated by doing enough research and learning the market. If you decide to go this route, please do research beforehand. You can also try your hand at paper trading, which is a simulation of investing without the risk of losing actual money. They also have crypto versions of paper trading if you’re more interested in that. If you look at social media, many people swear by these methods while showing off their fortune. If you do end up successfully making money this way, don’t forget to always put some aside for retirement, as a huge influx of cash made this way can be gone in mere moments.
Real Estate is yet another option, although the barriers to entry are quite high. A large amount of capital is needed to start this option, as you need to own the property and in some cases build infrastructure on top of it. Passive money that is made from this investment, however, unlike the prior examples will keep coming as long as someone is renting your property. This means that you’re able to make money even while retired.
The moral of this story is to start investing in your retirement as early as you can, even if you’re well past your 20’s. With different ways to go about saving for your retirement, just choose what best fits you and your lifestyle the best. If you like high returns and managing your own finances frequently, something like stocks and bonds works out well, but if you like passive income you don’t like to micromanage, pension and investment plans like PERA will work better for you. If you think about your future now as opposed to when it comes, you’ll save yourself from hardship and will be able to retire comfortably.