Are You Financially Set For Retirement?
We all look forward to a comfortable and delightful retirement. Everyone wants to get to that time when they longer have to suffer the daily commute, be stuck in the office from 8 to 5 or deal with bosses or colleagues we don’t like. But, before you decide to jump the gun, you have to ask yourself this: Is your bank account ready for your retirement?
Some of us would want to retire at the typical retirement age of 60 or 65. Some would like to achieve early retirement at 55, or even much earlier. Regardless of the desired age of retirement, how would you know if you’re ready to retire?
Here are four major milestones that you should achieve before you can really say you’re ready to retire.
1) Always have an emergency fund
Retirees will have their retirement money in the form of monthly pension or a lump-sum retirement package. So why still be concerned with saving at least three-month worth of living expenses?
The answer: To be financially prepared in case of an emergency.
You don’t know what could happen. A calamity — flood, earthquake, typhoon, fire — might strike destroying your house. A medical emergency might require you to undergo a major surgery. Other unpredictable events could happen, and some of them might require huge amount of cash.
Thus, you should be ready with an all-cash emergency fund that you can tap into anytime. This emergency fund gives you immediate access to money which you’ll need in case of an unforeseen event. Preferably, this emergency fund should be at least three-month’s worth of living expenses in order not to cause a disruption in your finances.
Save and park your emergency fund in a time deposit or money market mutual fund or UITF that you can withdraw anytime. Do NOT put your emergency fund in stocks or real estate or other assets that take time before you can liquidate.
2) Own a house
One other financial milestone you should achieve before retirement is owning a house. Your place of residence should already be an asset, not a liability, to you by the time you retire.
If you took out a housing loan to buy a house, this mortgage should have been fully paid by the time you retire. Otherwise, if you’re retired and you’re still paying the monthly amortization of your housing loan, you might suffer from a financial setback since you’ll have to find a steady stream of income to pay for the loan repayment.
If you’re going to get a home loan, choose a payment period that corresponds to your retirement age and your ability to make monthly payments during the loan tenure.
For example, if you’re 40 years old right now, it doesn’t make sense to get a 30-year housing loan. You’ll be 70 by the time your mortgage is fully paid. And if you retire at age 60 or 65, where will you get the money to continue paying the monthly repayment in the last five to 10 years?
3) Get rid of all debts
A happy retiree is someone who is not tied down by any financial obligations. And a happy retirement is when you’re financially independent — away from all the financial obligations.
Aside from the housing loan mentioned above, you should have paid off all other debt obligations you have, including credit card debt, car loan, personal loan, and other forms of financial obligations. You won’t be be able to enjoy retirement if you’re still straddled with debts and loans.
Don’t to get any additional loans, especially if you’re close to retirement age, and make active effort to clear off your current debts as you get closer to your retirement age.
List down all your debts and rank them based on the interest rates. The ones with the highest interest rate are the ones that also suck the most money out of you. So prepay or terminate these high interest-bearing loans first.
You can consider other banking products to help you clear off your debts sooner and save on interest, such as credit card balance transfer or debt consolidation plan.
4) Stable passive income
Retirement shouldn’t necessarily lead to a drastic scale-down of your lifestyle. To avoid this, you should have access to a steady cash flow that could pay for your desired lifestyle.
Thus, years before retirement, start preparing a “nest egg” or a source of cash that could provide you with at least 80% of your previous monthly salary. This pretty much assures you of a lifestyle that may be the same as the lifestyle you had when you were still relying on your employment income.
Sure, a part of this nest egg could come from your pension fund or retirement package, but if you’re going to rely primarily on SSS (Social Security System) or GSIS (Government Service Insurance System), this may not be enough. Years before retirement, start building a nest egg that could produce at least 80% of the monthly salary you had.
It’s always safer to have an additional retirement fund outside of your SSS or GSIS. This can be done by saving and investing as early as possible to grow your money. Of course, choosing the best investment option that fits your risk tolerance and investment objective is key.
What are the investment options available? There’s an abundance of investments that you can venture nowadays, and they aren’t just limited to business ideas. The secret to most affluent individuals today aside from starting their retirement savings early are the following high-yielding investments:
- PERA (Personal Equity and Retirement Account)
- Unit Investment Trust Funds (UITF)
- Mutual Funds
All set to retire? If you’ve achieved these four financial milestones, then yes you might be ready for a delightful and financially comfortable retirement. If not, start working on them today!