3 pitfalls in retirement planning
Statistics show that out of 100 working Filipinos, less than 3 are capable of retiring comfortably. The others either rely on their children, the government or charitable institutions.
How unfortunate given that retirement planning is an easy task – the planning part that is. Input the figures into a retirement calculator or an MS Excel program, and you have your magic number already.
In theory, everything is easy. The hard part is putting it into action – and continuing that for the duration of the plan.
And all too often, we will hit pitfalls along the way. Unless we are able to counter these, our retirement plan could well be jeopardized.
Are you hit by the following retirement pitfalls?
1. Too little
When starting a retirement plan, it is better to overestimate expenses rather than the opposite.
Increasing inflation rate by one or two percentage points higher would not hurt as well. The last thing we want is to find out the fund we saved for the past 20 or so years would only last for 5 years because we have saved too little.
An understated retirement plan runs the risk of not providing you the lifestyle you wish to enjoy. Worse, you may even have to downgrade it. It also runs the risk of you outliving the usefulness of your assets.
Think about it, do you want to just have enough?
Once you begin your retirement plan, you might find you are making little progress toward your magic number. Do not fret. Each contribution will eventually add up over time. Interests will compound even the littlest amount you put in and will snowball into a significant sum eventually.
2. Too late
Financial planners advise people to start their retirement plan 20 to 30 years before the planned retirement. Think about it, our government-mandated contributions begin in our early 20s once we start working. That is 40 years of accumulated contributions – even longer than what the financial planners advised.
But the sad reality is that pension benefits from social security are never enough. At the cost of living today, the pension fund simply would not cut it. Know anyone who is satisfied with the pension he or she is receiving today? I do not know anyone either.
To continue the lifestyle we are enjoying requires us to fund it today. And that means starting as early as possible. When we start early, we do not need to have to take too much risk because over time, the money will grow anyway.
Two positive things can happen as well: we accumulate more than what we have set out for; or we accumulate it earlier than our target date.
3. Too conservative
Another pitfall is being too conservative in investing for our nest egg.
I am not saying to be completely aggressive and plough your money into the highest yielding financial instrument being peddled out there. But not taking calculated risk would prove to be more harmful than beneficial in the long run.
Take for example people who just utilize bank deposits to grow their money. The bank pays us a paltry 1.5% to 2% interest for deposits. Less withholding tax and what is left is something a little over 1%.
That alone is not a problem yet. It becomes one when returns are not able to keep up with the inflation. At an average rate of 4%, money put in bank deposits loses 3% of its purchasing power every year. Compound that over the course of 30 years, the result would be financially catastrophic.
Current financial conditions allow us to invest in higher-yielding investments, yet do not need to take too much risk. As long as we are getting more than what the inflation rate is, we should do just fine.
Remember, retirement planning is a marathon, and not a sprint. It is not about how quickly you can afford to retire, but how much you have to allow you to retire either comfortably, or even luxuriously.
Kendrick Chua is a registered financial planner of RFP Philippines. He writes regularly about personal finance. He is also a Chinese language instructor, TV host, free runner, and violinist. To learn more about RFP, you may email firstname.lastname@example.org.
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