Pinoy Fund Runners

Why do you need to prepare for your retirement?

Jake

Young professionals are complacent with their financial situation and doesn't bother them to worry about retirement at the early stage of their career. They kept on providing excuses like "I'm still young" or "I still enjoy working" as a reason for not planning for their future. Before we go further about retirement, let us try to define the true meaning of retirement by removing some common misconceptions about retirement planning.

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.

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Which Life Insurance is best for me?

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Jake

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.

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Types of Life Insurance

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Jake

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

I. Term Insurance

· Cheapest Life Insurance

· No Investment Component

· Remains in force for a specified period or term

· i.e. Just like car insurance, if nothing happened to your within the year, the cash you paid is as good as trash

II. Whole Life Insurance

· Life insurance that remains in force during the insured’s lifetime provided the premiums are paid

· Covers upto age 100

· Investment Component: Cash Values, profit sharing and dividends

· Cost higher than Term Insurance but cheaper than endowment

A. Straight Whole Life

· From the word itself, you have to pay for as long as you can, unless you were taken out of the picture

· Could self-liquidate by using cash generated by profit sharing or dividends to pay off the remaining premiums. Take note that dividends are not guaranteed. The user may need to continue on paying if the cash value of the policy becomes ZERO.

B. Limited-pay whole life

· From the word itself, limited-pay only. Usually between 5 to 15 years

· More expensive than Straight Whole Life

III. Endowment

· Most expensive among Traditional Life Insurance

· Investment Component: Cash Values, profit sharing and dividends

· Allows faster accumulation of funds ideal for savings

IV. Variable Universal Life

· Characterisitics of whole life and term insurance

· Could provide lifetime coiverage if sufficients are paid

· Investment component: Mutual Funds

· Flexible, at the same time liquid investment

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How to calculate your Life Insurance Coverage?

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Jake

If you really love your family, you defintely need to consider this. There are two ways calculate your needed Life Insurance. The ‘Easy Way’ or the ‘Hard Way’

1. Easy way – Used for Income Continuance.

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

This is just a rough estimate for breadwinners to consder in getting life insurance. The income factor is derived from the number of years prior to your retirement, wherein you are no longer generating an active income.

2. Hard Way – For us to do this easier we will divide this into segments, then add them all up

A. Income Continuance – To sustain the lifestyle of your dependencies on the event of your loss

a. Current Monthly Contribution to your family or dependencies – For this example we will use the amount 20,000

b. Interest Rate – This is the interest rate of the investment instrument used when the Death Benefit has been received by the beneficiaries. Let us assume it is only placed on the bank earning an interest of 2.5% p.a.

Annual Family Expense ÷ Interest Rate

20,000 x 12 ÷.025 = 9.6 M

B. Funeral Cost – Average funeral cost is around 350K. You don’t believe me? You may refer on this link for the breakdown: http://funeralinformation.blogspot.com/2011_01_01_archive.html

C. Estate Tax – This is the tax on the right of the deceased person to transmit his/her estate/assets to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition.

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

i.e. I have total assets amounting to 2.5M.

Tax = 135,000 + .11 × 500,000 = 190,000

This means that before the 2.5M peso worth of assets be transferred to my lawful heirs on the event of my loss, they need to pay a total tax of 190,000 first.

One way of preventing this Estate Tax is to transfer the assets to rightful heirs before the death of the owner. Of course, this is very difficult to predict.

D. Other Liabities – i.e. Mortgage Redemption, Personal Loans

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Why do you need Life Insurance?

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Jake

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".

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How to know your future expense?

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Jake

This procedure or formula is often used to determine the fund needed for your retirement, children's education, or life insurance coverage.

Ingredients:

12 pcs. of "Monthly Expenses" = CurrentAnnualExpense
1 pc. of "Average Inflation Rate" = i
Nth year you wish to know = n

Materials needed:

sphygmomanometer or blood pressure meter (just in case your blood pressure rise up once you've known your future annual expenses)

Step #1 Mix all ingredients under one bowl using the following formula:

    FutureExpense on the nth year = CurrentAnnualExpense*(1+i)^n

    i.e. Calculate your annual expense 20 years from now given

        average inflation rate = 5.5%

        Current Annual Expense = 240,000

    Future Expense = 240,000(1+.055)^20

            = P700,261 a year

You may place the ingredients in a Excel Table for you to visualize better on the growing expenses.

Step #2 Measure your blood pressure. If it went up, go to your nearest Financial Advisor and ask for recommendations on how they could help you plan for this.

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