A Guide on How to Strengthen your Finances Before Retirement
Retirement is one of the many milestones in a person’s life. All of us dream of a good retirement where we can do all the things that we weren’t able to do when we were so busy making a living and raising a family. We all look forward to those lazy mornings, quiet afternoons, and fun weekends at home with the family.
But realistically speaking, you have to prepare many years ahead if you want to have a retirement this wonderful. It takes years of financial planning just to be able to afford a comfortable retirement. Once you retire, your income is likely to drop substantially, and your spending patterns will change. Don’t wait until you reach retirement age to start managing your finances. You can start preparing for your retirement as early as today.
How early is early? Start saving at least ten years in advance. If you want to retire at 65, you can start building a retirement fund at 45, or even earlier than that. In fact, you can start building a retirement fund in your 20s!
You are never too young, or too poor, to start saving. It’s not true that only people who receive huge salaries can afford to have money for retirement. Being a minimum wage earner doesn’t exclude you from the need to plan for your financial future. What you do now to take care of your financial future is as important as earning a living.
You may only be saving just now because there’s just too many financial obligations. While you’re still not burdened with paying your car, house, condo unit, or children’s tuitions, get started on your retirement fund. Nothing beats saving in your 20s or 30s, but you can still make catch-up contributions as you grow older. But if you want these savings to be enough when you retire, you have to make sizable cuts in your current spending.
Just remember that all the sacrifices you are making today will benefit you in the future. Funnel money into a savings account and try not to use this money for emergencies. You should have cash enough to cover at least 12 months of living expenses, not including your emergency fund and your retirement fund. Add funds to these savings as you go along, and do it regularly.
The 20:20 rule suggests that you start preparing twenty years before your retirement, and then your retirement fund should be able to cover you for a good twenty years or so.
Say for example, you want to start saving and investing at the age of 40. You have 20 years to save and invest that so you can enjoy the rewards of your investments by the time you hit 60.
Your company and government retirement package will contribute greatly to your retirement income, but it should not be your only money source.
Take out a personal retirement plan and make conservative investments. Learn about different investment instruments that can give you higher yields without too many risks. Educate yourself about stocks, UITFs, and mutual funds. You can also go for the more traditional products like time deposits and personal savings.
If you want to enjoy a good and financially comfortable retirement, you should strive to be completely debt-free by the time you turn 60. It’s easier said than done, yes, especially if you’ve just taken out another salary loan application after paying off the previous one. It’s hard when you have to pay credit card bills, plus the car and the house, month after month. If you can cut back on unnecessary spending, you can save more money and avoid piling debts.
If what you’re earning now is just enough to cover your monthly expenses, find ways to increase your income. You can add more streams of income which you can use to boost your savings and grow your retirement fund. You can freelance on the side, or run a home-based business. You can also explore other careers that will be more financially rewarding.
Ideally, your retirement fund should only cover your daily living expenses. But what happens if you have to make an emergency trip to the hospital or get confined for several days? Most health insurance in the Philippines can only cover people up to 70 years of age. If you don’t have health insurance, you will have to pay for your medical costs with your own money.
It’s good to have a separate emergency fund that will pay for both medical and non-medical emergencies. Better to be prepared and have money to spend rather than lose everything you have worked so hard for just to pay for medical bills.
There’s no formula that will automatically compute how much you will spend for your retirement needs. It will depend on your income, lifestyle, and unforeseen circumstances, such as illnesses or medical emergencies. However, you can still draw up a reasonable estimate.
What do you plan to do upon retirement? Do you want to travel to places you never had the chance to visit when you were busy raising a family, paying for mortgage, and sending your children to school? Do you want to put up a small business so that you will still have a steady source of income?
A good rule of thumb is to have 80% of what you are currently earning as a retirement income, and to pay for the costs of daily living. You can also factor in a 5% inflation rate when computing for how much money you will need.
Retirement planning is a very long and often challenging process. So many things can happen which can change your financial situation and alter your financial plans. Don’t be afraid to adjust your plans to adapt to your current situation.
To help you in being better prepared, here’s a couple of good, additional ideas on how you can retire rich.