Saturday, February 14, 2015

Starting Your Retirement Fund

A lot of us dream of retirement – those golden years when we can finally sit back, relax, and enjoy the fruits of our labors (a.k.a. our grandchildren). 
But how many of us are truly ready for the time when we actually get to retire?
It is a widely accepted financial rule that people, in order to maintain their current standard of living, should have at least 70% of their current income after they retire.
Now let’s look at the retirement plan held by most of us: our government pension. Let’s say you’re earning P15,000 per month, and you need 70% of that after retirement. 
If you’re a GSIS pensioner, your government pension will reach 70% of your current income only after you’ve been paying contributions for 27 years, based on the GSIS online calculator. On the other hand, if you’re an SSS pensioner earning the same amount of money, you will need to be paying contributions for 34 years, according to the computation guidelines on the SSS website.
But what happens if you’re earning more than 15k? 
With GSIS, no matter how much you earn, you’ll be getting 70% if you are a contributing member for 27–28 years. This is because GSIS has no salary ceiling – at least, for now. 
However, it’s a completely different story for SSS members, because SSS has a P15k income ceiling. So even if you’re earning P100,000 per month right now, SSS will still compute your pension based on a P15,000 maximum salary credit. Imagine what sort of dent that will make in your budget when you begin to depend on your SSS pesion!
The takeaway here is that, for many of us, government pension is not enough to support us during retirement. We have to find another way to save and prepare.
 First Steps
But before we start stocking funds for our retirement, we need to put our finances in order. 
First things first: get insured. Let us get something clear – insurance is not an investment you make to prepare for your retirement; it is a duty you need to cross out of your to-do list before you begin preparing for retirement.
After all, the reality is, not all of us will even reach retirement. What if death comes while our family still depends on us?
Liz San Pedro, mother of three, said, “My eldest is just eight years old now, and I contribute half of our family income. If something happens to me, what will happen to them?
“With term insurance, I can sleep peacefully knowing that whatever happens, my family will be taken care of. My policy closes after ten years, but by then, my eldest child will be big enough to help take care of the family, so even if I die then, they won’t need the insurance so much anymore.”
Step two: Clear your interest-bearing debts and start an emergency fund. Debts with interest eat up your money little by little. Trying to save money when you have a debt is like trying to put water in a bucket with a very large hole.
But while debts eat up your money little by little, emergency expenses can eat you up alive in one big bite. 
The big question is, which should you do first: pay off your credit card or fill your emergency fund?
“While I have credit card debt, I’m focusing on paying it off, and the freed credit limit becomes my emergency fund,” said Marie Yacat, a call center team leader. 
“Once the card is paid off, I’ll open a passbook account and put our emergency funds there.”However, Ermie De Guzman, a financial consultant, warned that Mommy Marie’s method does not always work.
“When your emergency fund is in your credit card, every small thing, such as a broken microwave oven, becomes an emergency.” 
Her recommendation: “Set aside at least one month’s salary in a 30-day time deposit first, as your real emergency fund. That way, it is not so easily accessible, but it will be easy to liquidate in a real emergency. At the same time, it will be earning more interest than a regular savings account. 
“Then, freeze your credit cards – I mean really put it in a Tupperware full of water and put it at the back of the freezer – so you have to wait a long time for it to thaw before you can actually use it. That will give you time to think and change your mind.”
Once your debts are paid off, then you can begin to work on putting 3–6 months worth of expenses in your emergency fund.
Step three: Review your current budget. There are two reasons for doing this: First, you want to see if there are expenses in your current budget that you can delete or at least shrink. Examples:
 Do you really need cable TV service? 
 Can you replace your current credit card with one that has lower finance charges and no annual fees? 
 Are there ways you can save on electricity bills and water bills?
 Can you start a vertical garden or raise urban livestock so you can grow some of your own food?
Second, once you see your current budget, you know what amount you should stick with. Fifteen percent of what you get after that should go to your retirement fund. 
“But,” you may ask, “Why just 15%? Why not 100%?” Finance guru Dave Ramsey explains, there are two other things you need to spend the remaining 85% on: (1) your kids’ college fund and (2) paying off your home mortgage early. 
But, he warns, don’t be tempted to spend everything on the school and the mortgage either. Make sure you set aside 15% for your retirement fund because, Ramsey says, “the kids’ degrees won’t feed you at retirement.”
Stocking Up
Once you have cleared your debts, installed your emergency fund, and fixed your budget, you can begin saving up for your retirement:
1. Increase your earnings. If you are employed, you might want to go to your boss and broach the topic of a raise. (But make sure you deserve a raise, because that is the only acceptable reason for asking for one. Don’t even think of saying “Please give me a raise because I’m saving up for retirement.” That will only get you a raised eyebrow and a very annoyed boss.) 
You could also moonlight. Whatever you are currently doing – accounting, HR, editing, etc. – go online and see if anybody is looking for freelancers or part-timers who do your job. Then, send your resume and application letter there. 
You could start a small side business, like an online store or a small food franchise.
If you are self-employed, consider the 20/80 rule: 80% of your income comes from just 20% of your business. Find those parts of your business that take up so much of your time and energy but give little returns. You may earn more if you outsource those parts so you can focus on your real money earners.
2. Open a Personal Equity and Retirement Account (PERA). The PERA Act of 2008 was established to encourage people to save for their retirement. Basically, you put your money in your PERA through your bank. That money is then invested into mutual funds or other medium-risk long-term investment vehicles. 
Assets will be distributed when you satisfy two conditions: (1) You have maintained your PERA for five years, and (2) you are over 55 years old. This could be in lump sum or pension form.
Early withdrawal will be subject to penalty, except if you are using the money to pay for more than 30 days of hospitalization, of if you become permanently disabled.
What makes the PERA unique is that the money you earn here is exempted from the hefty 20% tax that investment earnings are usually subjected to. Also, if you die and your beneficiaries receive your qualified distributions, their inheritance will also be exempt from both income tax and estate tax.
In addition, 5% of the amount you invest in your PERA will be issued an equivalent tax credit certificate, which you can use in paying some of your income tax.
3. Make a high-risk investment. You already have a low-risk investment: your emergency fund, which you put in a time deposit. You already have a medium-risk investment, which is your PERA. 
Now complete your portfolio diversification by making a high-risk high-interest investment as well. Put some of your money into speculative stocks, foreign exchange, etc.
But how much money should you put here? 
Let’s start with the 15% money you’re putting in your retirement fund. (You’re putting 85% in your home mortgage and your children’s college fund, remember?)
According to finance blogger Fitz Villafuerte, half of your retirement fund should be put in your medium-risk investment. Then, take your age and halve it to get the percentage of money that you should put in a low-risk investment, which may or may not be your emergency fund. The rest, you put in your high-risk investment.
For example, let’s say you’re 34 years old, with P50,000 to invest:
 Put 50% (P25,000) in your PERA.
 Put 34/2, or 17% (P8,500) in your low-risk investment.
 Put the rest (P50,000 – P25,000 – P8,500 = 16,500) in a high-risk investment.
Just remember, before you put money in any investment at all, study your investment instruments and understand them well. If necessary, get somebody to teach you.
Because, more than any stock or account or mutual fund, there is one investment that will ensure your financial security better than anything else: your investment in your own financial knowledge and education. When you understand where your money goes and how it grows, it will be hard to go wrong; and you will have a much better chance of being adequately prepared for your retirement.