How To Manage Your Own Retirement
During our active years, it might be easy to provide for our needs from our regular income. Once we retire, our financial situation will certainly change. Some think that their spending pattern will drop significantly during retirement. Yes, you may no longer have to pay monthly amortization for your house or car, but don’t forget that there is a good chance you may be needing a significant amount for your health fund by then.
In preparation for the sudden financial shift, we don’t need to wait until after we retire to deal with these significant financial circumstances. Similar to having a child or buying a property, retirement has a cost that can be estimated and prepared for in advance. Drawing up your estimated budget and taking into consideration the many aspects of a retirees’ lifestyle will give you a much greater sense of control over your future situation.
To those who are about to retire, if you find a budget gap between your spending and your retirement income, then you need to look for ways by which you can prolong your retirement fund.
It may be daunting to manage your retirement money, but you can reduce the uncertainties if you follow a simple process. First, you need to identify the things that you must spend on and those that you want to spend on.
Second, take a full inventory of all the sources of funds that you can tap during retirement. If you have invested in different vehicles, you can ladderize it by planning the withdrawals based on their maturity and availability. Third, decide what percentage of withdrawals you need to apply if you want your money to outlive you.
The question is how much money should you take out each year? The answer should depend on the safe withdrawal rate to make sure you will have enough money until the end of your golden years. Let’s say, if you withdraw P800,000 every year from the P20,000,000 total retirement fund that you have invested in, you will have an initial withdrawal rate of 4 percent. If your calculations use this withdrawal rate with an assumption of a 4 percent inflation rate, you will never run out of money.
The above example would give you a monthly budget of P67,000. What if you want to have a budget of P100,000 every month? That represents an annual withdrawal rate of 6 percent. You can withdraw 6 percent every year but the lifespan of your fund will definitely suffer.
If you are going to have a higher withdrawal rate, then you need to be flexible in managing your retirement fund.
Consequently, during periods of economic uncertainties, you may have to make some adjustments, or even reduce your withdrawals during such years. In good times, you will be eligible for a raise. But this raise should be ideally based on the consumer price index (CPI). If inflation goes up to 5 percent, you can adjust your retirement budget based on that.
To compensate for a large amount of withdrawal, you need to have the right proportion of stock holdings to fixed income investment. A good portion of your investment must be exposed 50-80 percent to the stock market.
Meaning, a higher withdraw rate will entail higher risk exposure for your fund.
Since we really don’t know what will happen to the investment world in the future, it is also ideal to have another source of income during retirement. Having a part-time job, such as a consultancy, will provide you not only an additional source of income but will also give you a meaningful way of using your time to avoid boredom. Nothing should require you to stop working just because you’ve begun taking a pension. Having a rental income is another good source of passive income.
Retirement is a fun stage of life that requires serious planning. If you haven’t retired yet, and time is still on your side, it’s a good idea to start boosting your pension income now by increasing your investment. To those lucky few who are given additional benefits by their company, they can take advantage of the opportunity to maximize their contribution to the company’s provident fund.
I know it’s not easy to juggle your own retirement fund, and that’s why having a trusted expert on your side is a great help. You just need to keep in mind the sort of timeline that you have and how much money you need to prepare. Having the determination and being diligent with your hard-earned money will set you on the right path toward a graceful retirement.
Christopher G. Cervantes is a Registered Financial Planner of RFP Philippines. He is author of “Financial Planning for the Fast Changing World” and “The Seed Money.” To learn more about personal financial planning, attend the 68th RFP program this March. To inquire, email firstname.lastname@example.org or text <name><email><RFP> to 0917-9689774.
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