Will Retirement Pay Be Enough?

by Efren LL. Cruz, RFP

To employees, the prospect of a pot of gold at the end of their employment rainbow is such an alluring thought.To some, they would have the added benefit of getting a pension on top of a lump sum. But the question is, “Will retirement pay be enough?”

In our EnRich™Cash, Debt Risk & Wealth (CD-RW) training program, training participants are often taken aback by the enormity of the cost of retirement.

Take the retirement lifestyle for a fictional household that would roughly cost P800,000 per year if enjoyed today. This assumes P50 per meal per person for a 2-person household; P1,000 a month for clothing; P15,000 a month for shelter; P8,000 a month for transportation; P80,000 a year for entertainment; P10,000 a year for gifts; P20,000 a month for medical expenses; and a 10% allowance for miscellaneous items. We assume that the household members are both 35 years old and desire to retire at age 60. Starting 25 years from now, this lifestyle will cost a total of around P97 million for a 20-year retirement period assuming an inflation rate of 5% p.a.

On the assumption that our household earns a gross of P150,000 a month on 13 months of pay per year, gets a 5% pay hike every year, has a tenure with a current employer of 10 years and is entitled to a retirement pay of 1 month for every year of service, the household’s retirement pay will amount to only P17 million 25 years from now.

Lastly, with a starting fund of P1 million, our household will have to save 85% of its income every single month from now until retirement age.With average income taxes at almost 30%, retirement is clearly impossible for our household.

What our household (and practically all other households) needs is to provide for their retirement in a more affordable fashion. Enter investing.

Should our household earn a net return of 10% p.a. from now until the age of 49 and just 5% p.a. thereafter, they just need to set aside 17% of its income every payday from now until the age of 60 to fund retirement.After that, our household can just sit back and enjoy the fat of the land.

The lesson here is to start saving and investing early for retirement. In reality, however, people mistakenly think that their retirement pay alone will take care of them.

Retirement for the Self-Employed

And what about people who do not earn any retirement pay because they are self-employed?

Well just like before retiring, the strategies to make ends meet are either to lower living costs or to increase income. And if costs are already down to their minimum, the best way is to create a going concern that would generate additional income to support saving activities.

Assuming no retirement pay, our self-employed household would need to earn just 42% of its last income in addition to the 17% savings rate to fund retirement. In effect, the income from the going concern replaces the lump sum retirement. However, take note that there still should be savings, that the income from the going concern is present all throughout the 20-year retirement period and that income in retirement also grows by 5% p.a. Otherwise, our fictional household must not only continue to work but should also keep its living costs very low.

So in addition to saving early, people who do not have any retirement pay to look forward to need to set up a going concern that will be stable and self-sustaining by the time they retire and that can hopefully outlast them. Setting up the going concern only upon retirement is too late and downright foolish.

To know more about proper retirement planning strategies, attend the regular runs of EnRich™ CD-RW personal finance training program. Call (632) 216-1541, (632) 359-3094, email or visit for more details.

Efren LL. CruzEfren LL. Cruz is a seasoned investment adviser and registered financial planner with the RFP Philippines. He is the author of the bestselling books, “Pwede Na! The Complete Pinoy Guide to Personal Finance” and “Pwede Na! The Complete Pinoy Guide to Retirement & Estate Planning.” He is Chairman and CEO of the Personal Finance Advisers Philippines Corporation (PFA). Questions about the article may be emailed to efren@personalfinance. ph. Efren may be reached at the same telephone numbers and email addresses above for the scheduling of consultations and personal finance trainings. The opinion and views expressed herein are solely those of the author’s and do not necessarily reflect those of the PFA.

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