RETIREMENT planning has gained significant traction when it comes to financial planning here in the Philippines. People in general tend to put off preparing for retirement because of its inherent long-term nature however, this should never be the case—it is never too early to plan for retirement.
I think that there are four intertwined aspects that should be considered when preparing for retirement and these are anticipated expenses, source of retirement fund, risks (physiological) and time horizon.
All these should be accounted for simultaneously when it comes retirement planning and a financial planner should be able to guide retirees through this planning process to generate a plan that is acceptable and actionable on the clients’ part.
When it comes to expenses, a retiree can expect to have budget plan with allocations for most, if not all, of the following items: food, housing, utilities, transportation, healthcare, entertainment and clothing.
Estimates for these budget categories can be deduced from the desired standard of living of client upon retiring. While there are some rules of thumb that can be applied when estimating expenses, it would be for clients’ benefit that a financial planner should be able to simulate the expected expenses during the course of retirement based on clients’ goals using the future value of money concept.
An important concept in this simulation is the use of the appropriate inflation rate, which is the rate at which the price of goods is increasing. A good approximate inflation rate to use is 5 percent. However, one can visit the Philippine Statistics Authority website for a more in-depth look of monthly inflation rate.
During retirement, an individual generally experiences significant decrease in monthly income (i.e., salary). However, there are various sources where a retiree can withdraw funds from and these mainly are company retirement benefits, pension fund (SSS/GSIS/private sources) and retirement fund through investments.
When planning for retirement, a financial planner and client should be able to account for these possible sources of income. The critical idea for this aspect is that it is not enough to have just a plan to secure the estimated fund available upon retirement but to also have plan to manage the sources of retirement fund during retirement itself. The anticipated retirement expenses and sources of income should be aligned to determine the funding gap in which an investment program can be made by the financial planners.
On the other hand, the risk discussed above pertains to health risks that a retiree may face during retirement and will have serious impact on the budget planning mentioned above. These include sickness, hospitalization, disability, major illness, and death.
As expected with aging population, risk of getting sick increases and in order to manage these risks, a retiree should have ample safety nets in the form of insurance coverage that will provide support well through retirement period.
A financial planner should work with client to take stock of the current insurance policies a client has, and which will provide what coverage during retirement and to assess if additional coverage is needed. Aside from insurance coverage, Philhealth is the most common tool that retirees can use to manage health risks. It is essential for a financial planner to inquire on the retirees Philhealth status and ensure that the retiree has active membership to program.
When considering time horizon, there are two important timelines that should be considered—how far is an individual from the target retirement age and how long is the expected retirement period. These timelines have a critical impact on the investment options available, anticipated expenses that will have to be simulated and decisions that should be made when it comes to retirement planning.
While it may seem complicated, retirement planning is essential component of financial planning. It is almost a certainty that life events may happen that will change one’s retirement plan. It is important to bear in mind that retirement plans should be flexible despite the impression of rigidity coming along with its apparent complexity and subject for review every few years.
John Hero Alfonso Salvador is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 90th RFP this June 2021. For inquiries, e-mail [email protected] or text <name><e-mail> <RFP> at 0917-6248110.
Read full article on BusinessMirror