Pinoy Fund Runners

Before we compute for our retirement fund, we must consider the definition of retirement. From Colayco's books and from financial institutions.


This is the stage in life that we consider as 100% Passive Income.

We need to consider the following data for us to compute the needed retirement fund:

1. Current Personal Expenses – If we are to maintain our current lifestyle, no need to adjust this value. If you want to increase the quality of your lifestyle in the future, increase this value.

• i.e. Maintain Lifestyle = 30,000, Improved Lifestyle = 50,000

1. Average Inflation rate – average inflation rate from 1995-2009 is 5.8%. We will use this value for our example
2. Retirement Age – Government standard is age 65. But surely, majority of us would like to retire earlier than 65.
3. Life Expectancy – This is the age wherein you will be "Taken out from the picture"
4. Post-retirement interest rate – This is the interest rate of your investment instrument where your fund will be place during your retirement.

Step 1: Determine your annual future expense at the beginning of your retirement

i.e. Current monthly expense = 30,000. Annual expense (PV) = 360,000
Average inflation rate(i) = 5.8%
Post-Retirement Interest rate = 2.5%
Current age = 30
Desired Retirement Age = 55
Life Expectancy = 75

Years before retirement (p) = 55-30 = 25

Using compounding interest formula:

FutureValue = 1,473,819.14

You may also use the MS Excel Function "FV" to calculate future value.

i.e. =FV(0.058,25,0,-360000,1)

Step 2: Calculate the Real Interest Rate.

During retirement, our expenses will still increase over time due to inflation. The Real Interest Rate adjusts the rate of return of your investment if inflation rate was to consider.

From our example:

If we experienced a negative value on our Real Interest Rate, it means that the inflation rate is higher than the interest rate.

Step 3: Calculate the retirement fund needed to be able to sustain lifestyle from Age 55 to Age 75

The formula here is a bit complicated. We will be using the Simple Interest Amortized Loan Formula to get the retirement fund needed:

PMT = -1,473,819.14 (this should be negative)

i = -3.119% (This should be negative since inflation rate is higher than

n=Retirement Years = 75-55 = 20 Years

PV= 41,801,703.26

You may Also use the MS Excel Function "PV" to retrieve the same value.

=PV(-0.03119,20,-1473819.14,0)

The graph below shows a good illustration of your fund and expense during your retirement years:

From the example, for him/her to retire comfortably, he/she needs to accumulate a total fund of 41.8M at the age of 55.

Did it give you a headache? Which one? How to do the calculation or how to accumulate 41.8M pesos worth of retirement fund?

 

I graduated from De La Salle University, one of the Top 3 Universities here in the Philippines, and also has the most expensive tuition fee among the three. During my college years, my parents are incapable of paying DLSU's school expenses. Fortunately, my parents took an education plan (when I was one year-old) which covered almost 80% of my total school expenses. The total amount of money invested by my parents was around 23K, but it was able to cover almost 450K worth of tuition fee expenses in DLSU. Do you think it's worth investment? DEFINITELY.

According to CHED, tuition fee increases around 12.25% per annum. On top of that, there are also increasing miscellaneous expenses (i.e. allowance, food, uniform, books) caused by inflation rate. Average inflation rate is around 5.8% (based from 1995-2009).

If we are to consider this annual increase, this will be the projected annual tuition of known universities here in the Philippines

	2010	2015	2020	2025	2030
UA&P	201,600	359,271	640,257	1,141,000	2,033,375
DLSU	139,165	248,006	441,971	787,635	1,403,644
ADMU	114,174	203,469	362,602	646,193	1,151,580
Assumption	106,237	189,325	337,396	601,272	1,071,526
San Beda	80,832	144,051	256,712	457,487	815,287
UE	60,279	107,423	191,439	341,162	607,985
UST	56,778	101,184	180,320	321,348	572,673
AMA	53,071	94,578	168,547	300,367	535,284
Lyceum	47,628	84,878	151,261	269,561	480,385
UP	45,360	80,836	144,058	256,725	457,509
Holy Spirit	41,001	73,068	130,214	232,054	413,544

You don't need to plan for your children's education if you plan to school your children in a 2 year vocational courses. But of course, as a parent we would like to provide them, as much as possible with the best quality education there is. If we are to anticipate the future costs of these universities, do you think your hard earned savings is enough? That's why you need to plan for your children's education.

Misconceptions

• "I plan to retire at the age of 40 so that I could setup my own business
• Retirement is not having a business of your own. If you set-up your own business, you would still be actively working of your income 

• "I would like to stop working at 55 so that my children will take care of me"
  • Retirement is not depending on someone else. Would you like to burden your children of additional financial expenses which they should have been using it for their own family? Think again!
• "I think I will die early, that's why I don't think about retirement"
  • What if you will live long? Would you like to see yourself begging for food from your children? Would you like to see yourself still working at the age of 70?
• "I will plan on my retirement 5 years before I retire"
  • Seriously? Have you heard of inflation rate. Or are you hoping that you will win the lottery.
• "I have retirement benefit on my company, I don't need to worry about it"
  • Good for you if you imagine yourself working at your current company at the age of 55 or 65. But you have to consider other situations that might relate on your company. What if you no longer like to stay on your company? What if the the company was dissolved? What if they laid you off?

Statistics

Statistics based from Study of Lifestyles, Attitudes and Relationsips (SOLAR), out of 100 Filipino Retirees:

• 22 continue to work
• 30 rely on charity
• 45 depend on their family or relatives
• ONLY 2 ARE FINANCIALLY INDEPENDENT
  

The right definition

I found the suitable definition of retirement from the books of Colayco and sales presentation of an insurance company. Retirement is being able to have sufficient fund or income generating assets that is able to sustain your current lifestyle. It is the capability to achieve financial freedom without having to worry about money to support your needs and wants.

Retirement expenses

Based on the definition of retirement, we will emphasize on the aspect of "no longer actively working to sustain your current lifestyle".

Because of inflation rate, you may want to consider planning for your retirement because of increasing expenses. If your current age is 30, and your monthly expenses is 20,000/month with an annual inflation rate of 5.8% (15 year average inflation rate from 1995 to 2009), your monthly expense at the age of 55 is around 81,000/month.

Age	Monthly Expenses
30	20,000.00	Still Working
35	26,512.97
40	35,146.87
45	46,592.39
50	61,765.13
55	81,878.84	No Longer Working
60	108,542.55
65	143,889.26
70	190,746.56

Now the big question is "with all your savings or provisions, do you think it could sustain your lifestyle during your retirement years even though you are no longer working?". Now that is why you need to plan for your retirement.

That depends on your financial goal and investment preferences.







To interpret this table, here is a good example:

If your main concern is more focues on income protection rather than your investment returns, avail on Term Insurance only.

If your main concern is investment and your investment preference is more aggressive with the understanding of higher potential returns, opt on getting Variable Universal Life.

Those who are thinking of getting Endowment or whole life as a means of investing, you may want to reconsider on getting Variable Universal Life instead. The investment return is very low but higher than what is offered by the bank. Whole Life and Endowment is only for people who are realy UBER conservative.

There are different types of Life Insurance, but I will only cover those that are commonly offered here in the Philippines.

 

Ages	Income Factor
<30	15 X Annual Income
31-35	13 X Annual Income
36-40	14 X Annual Income
41-45	10 X Annual Income
46-50	8 X Annual Income
51-55	7 X Annual Income
56-60	5 X Annual Income
>61	4 X Annual Income

Over	But Not Over	The tax shall be	plus	Of the excess over
	P 200,00.00	Exempt
P200,000.00	500,000.00	0	5%	P 200,000.00
500,000.00	2,000,000.00	P 15,000.00	8%	500,000.00
2,000,000.00	5,000,000.00	135,000.00	11%	2,000,000.00
5,000,000.00	10,000,000.00	465,000.00	15%	5,000,000.00
10,000,000.00		1,215,000.00	20%	10,000,000.00

 

The need for life insurance can be found from it's meaning, which is a system designed to protect people against financial hardship in the even of a loss.

Life Insurance is a risk-sharing business. For me, it is a blessing. Not everyone is blessed with Life Insurance especially for those who are old or sickly.

But often, this is being neglected by the young and healthy. They kept on providing excuses for not getting an insurance by telling "I'm still young…I'm still healthy…I don't have any dependencies yet", and when they decided to get one, they are being declined either because they are sick or too old already.

As a breadwinner, Life Insurance is needed to protect your family or dependencies from financial hardship on the event of your loss. These financial hardships includes:

• Funeral Cost
  
• Expenses to sustain the lifestyle of your dependencies
  
• Estate Taxes
  

For yourself or for your family's financial security, this could help you prevent a major financial lose in case a family member was "taken out of the picture". After you insure yourself, you should insure your whole family even though you are the breadwinner. Why? I'm not trying to become morbid here, but do you think the lost of a family member only dwells on the emotional burden?

If you have parents who are still alive and healthy, insure them, because the financial burden will definitely pass to you on the event of their loss.

As a business man or company owner, you may insure key person of your company to ensure company's success on the event of his/her loss.

To summarize in just a few words, the key benefit of Life Insurance is "Peace of Mind".