By Robert James D. Morales®
“The future value of what you save today, compounded, will determine the quality of your life and the lives of your loved ones tomorrow.” –Robert James D. Morales, RFP®
I am not pertaining to the quality of life as a whole but only pointing to one aspect of our life, that of our financial life which at times can be neglected and misunderstood. All of us, like it or not have a financial life, whether we are in a low income bracket, middle income bracket, high income bracket, or just about to start looking for a job or retired from work.
Doing everything we can to improve our finances is like taking care of our means to survive and meeting our every need and obligations in life. By so doing, we will be able to hopefully save it, make it grow, make it last longer, protect it and most of all afford the future.
For most of us, money is not everything but everything needs money. Even a simple get together with family or friends needs a little cash for food and drinks. We all know that money is not an end in itself but only a means to do good and serve others. The quality of our financial life depends on our own definition. And it’s not about how much. It’s about defining what kind of lifestyle at present and in the future we would like to be in. Take, for example, retirement.
There are two components for retirement income planning: personal planning and financial planning. Personal planning is important because it is the determining factor of our satisfaction with our retirement lifestyle. Financial planning is crucial because it identifies our sources of income and expenses and establishes our retirement budget, based on our personal plan.
All too often we enter retirement and do not place enough emphasis on personal planning to ensure we maximize our opportunities. So we should take the time now—at an early stage on our planning process — to think about the choices and how we would like to spend our time during retirement.
Do we want to volunteer at a local hospital? Take up that hobby we were always interested in, but never had the time to start? Go back to school and pick up a few special courses? Start our own business? Travel around the world? Buy a property in a colder climate like Baguio City and spend a few months there every year? Putting up a charity foundation for the poor? Or simply having enough to fund our daily expenses during those years?
These, and many other lifestyle questions based on our preferences, are all important factors to consider when planning our retirement since our choices will drive the financial circumstances that must be met in order to achieve our goals. Will we have adequate funds to provide the kind of retirement lifestyle we envision?
Remember our income will likely come from three general sources: employment related sources, personal investment sources and business related sources. Our retirement will be more enjoyable if our income is structured to fit our lifestyle choices and if we have developed a retirement plan to protect the assets we have worked hard to acquire.
Factors to consider
When it comes to how much savings we’ll need for retirement, there are several considerations we should evaluate and factor in, as we contemplate a comfortable retirement: inflation rate, average return on investment, desired monthly income in today’s peso value, current age, number of years to save and invest, projected monthly income needed at retirement, age we want to retire and total retirement fund needed in the future.
Inflation is known to be the ‘silent savings killer.’ It lessens the buying power of our peso every year. So to combat inflation and maintain the buying power of our peso, we need to invest some of our savings in different investment vehicle in order to outperform or hedge inflation. The more time we have to save and invest, the less cash we will need to build more on our retirement fund. Hopefully, by that time the fund is enough to help us live on its interest alone.
Unfortunately many people take this opportunity for granted, become too complacent or don’t have the sense of urgency just because there are ‘many years to come’ before we realize it’s too late.
We have to remember that when we want to prepare for a comfortable retirement, time, money and investment return are our best ally to meaningful and successful golden years. That is why the best preparation for this is to make good use of today.
There are three reasons why people will retire broke and unhappy later on in life: Not saving enough, Making poor investment decisions and Present lifestyle expenditures. Not saving enough for retirement is the biggest problem. How much do we really need to save up now to fund our retirement dreams? Do we have some catching up to do? If we are behind in savings it doesn’t mean we should be giving up. We may have years ahead of us to make the difference and every little bit counts. But one thing is certain, not having enough money saved for retirement will have a negative impact on our lifestyle down the road.
If we don’t have enough savings for retirement a few things can happen:
- We might have to work longer.
- We might not be able to do the things we planned for in retirement.
- We may become a burden to our family.
- If we have serious health issues it could mean liquidating our assets or we may result to excessive borrowing.
Making poor investment decisions are those who might be far too aggressive and can’t whether a steep decline shortly before retirement and we have those who invest far too conservatively from the start and come up short in the end. We need to strike a balance and adjust our investment strategy over time as we age and our needs change. There’s no magic portfolio that works for everyone, in all market conditions, all the time. But it’s up to us to understand what we’re investing in, what the risks are, and how those investments play a role in our long-term objectives.
Present lifestyle expenditures.
As we earn more money and become more successful we generally spend a little more money on the finer things in life. After all, isn’t that what it’s all about? We want to make more money so we can enjoy some of the fruits of our labor. It’s great to be able to buy things that improve our quality of life, but this lifestyle can go too far. It starts out with little things, but eventually it turns into a bigger house, nicer cars, better electronic gadgets and maybe even more elegant vacations. If our income goes up but our expenses also continue to go up the net result is often zero. We make more, spend more, but still don’t have enough left over to save more. I’m reminded of what American poet, Emily Dickinson once said, “If you take care of the small things, the big things take care of themselves. You can gain more control over your life by paying closer attention to the little things.” So we need to be faithful in the little things because usually it leads to something big. Either more unnecessary expense that lead to not having enough to set aside for the future or more saving opportunities to build on our wealth for the future.
Tracking of our expenses will be very helpful to see the difference between our needs and our wants. Many times it is our wants that need to be cut back. We still might opt for a bigger house or a better car, but we shouldn’t let these things interfere with our ability to save. When we start making more money make sure we treat our retirement savings like any other expense. If we’re willing to spend 20% more on a new car payment we should be willing to put 20% more into our retirement account as well. If we don’t increase our saving along with our other expenses were going to be in for a terrible awakening upon retirement. It’s not a situation we want to be in.
The book of Proverbs sums up the reason why we should save. When we save, we can be prepared for the future, succeed with our plans, and be free of financial worry.
“The wise man saves for the future but the foolish man spends whatever he gets.” – Proverbs 21:20
Robert James D. Morales is a Registered Financial Planner of RFP Philippines. He finished and passed the Chartered Wealth Manager program given by the American Academy of Financial Management. He is also the Marketing Director of Personal Finance Advisers Philippines Corporation. And has many years experience in the Financial Service Industry. Questions about the article may be sent by SMS to 0906 476 9182 or e-mail firstname.lastname@example.org