Retirement is often called the longest holiday of your life. Why? Because when you retire, you will no longer work, and you will be on a perpetual holiday. And since you will stop working, your day-to-day expenses will now come out of your retirement fund. So how much exactly do you need for your retirement?
The amount you need for your retirement is dependent on several factors:
- Your current age
- Your target retirement age
- Your current monthly expenses
- The projected inflation rate
- Your life expectancy
To demonstrate, let’s take the case of Maria, a 35-year old, single female. Since Maria is female, she has a life expectancy at birth of 73 years (see our post entitled Filipino Women Live Longer Then Filipino Men).
- Age: 35
- Target retirement age: 60
- Current monthly expenses: P30,000.00
- Projected inflation rate: 5%
- Life expectancy: 73
Here’s the step-by-step way to calculate how much Maria needs in the future for retirement.
Step 1. Subtract the current age to the target retirement age to get the number of years until retirement.
Years To Retirement = [Retirement Age] - [Current Age] Years To Retirement = 60 - 36 = 24
Step 2. Multiplying the monthly expenses by 12 to get the annual expenses.
Annual Expenses = [Monthly Expenses] x 12 Annual Expenses = P30,000.00 x 12 = P360,000.00
Step 3. Raise one plus the inflation rate to the number of years to retirement to get the inflation factor rate.
Inflation Factor Rate = (1 + [Inflation Rate]) ^ [Years To Retirement] Inflation Factor Rate = (1 + 0.05) ^ 24 Inflation Factor Rate = 3.22509994371
Step 4. Multiply the Annual Expenses by the Inflation Factor Rate to get the Future Annual Expense
Future Annual Expenses = [Annual Expenses] x [Inflation Factor Rate] Future Annual Expenses = P360,000.00 x 3.22509994371 = P1,161,035.98
Thus, at age 60, Maria’s expenses will be P1,161,035.98 per year, or P96,753.00 per month.
Step 5. Subtract the retirement age from the life expectancy to get the remaining years.
Remaining Years = [Life Expectancy] - [Retirement Age] Remaining Years = 73 - 60 Remaining Years = 13
Step 6. Compute the annualized expenses for the remaining years by applying the inflation rate to the future annual expenses.
Future Annual Expenses at Age 60 (year 0) = P1,161,035.98 Future Annual Expenses at Age 61 (year 1) = P1,161,035.98 x 1.05 = P1,219,087.78 Future Annual Expenses at Age 62 (year 2) = P1,219,087.78 x 1.05 = P1,280,042.17 Future Annual Expenses at Age 63 (year 3) = P1,280,042.17 x 1.05 = P1,344,044.28 Future Annual Expenses at Age 64 (year 4) = P1,344,044.28 x 1.05 = P1,411,246.49 Future Annual Expenses at Age 65 (year 5) = P1,411,246.49 x 1.05 = P1,481,808.81 Future Annual Expenses at Age 66 (year 6) = P1,481,808.81 x 1.05 = P1,555,899.26 Future Annual Expenses at Age 67 (year 7) = P1,555,899.26 x 1.05 = P1,633,694.22 Future Annual Expenses at Age 68 (year 8) = P1,633,694.22 x 1.05 = P1,715,378.93 Future Annual Expenses at Age 69 (year 9) = P1,715,378.93 x 1.05 = P1,801,147.88 Future Annual Expenses at Age 70 (year 10) = P1,801,147.88 x 1.05 = P1,891,205.27 Future Annual Expenses at Age 71 (year 11) = P1,891,205.27 x 1.05 = P1,985,765.53 Future Annual Expenses at Age 72 (year 12) = P1,985,765.53 x 1.05 = P2,085,053.81 Future Annual Expenses at Age 73 (year 13) = P2,085,053.81 x 1.05 = P2,189,306.50
Step 7. Sum up all the annualized expenses from Retirement Age to Life Expectancy to get the retirement fund.
Retirement Fund = ∑ Future Annual Expenses from the previous step Retirement Fund = P1,161,035.98 + P1,219,087.78 + ... + P2,189,306.50 Retirement Fund = P22,754,716.90
Thus, Maria needs P22.8M pesos in her retirement fund when she retires at age 60. Note that P22.8M will cover the DAILY EXPENSES ONLY for Maria from Age 60 to 73. Expenses normally associated with old age such as medical bills, doctor’s fees, medicine, care giver services, major operations are not included. Moreover, it also assumes that the inflation rate does not go higher than 5%, and that Maria lives up to age 73 only. If inflation rate goes beyond 5% or Maria lives longer than age 73, her retirement fund will not be enough!
Ideally, Maria should have a separate fund for medical needs. If her medical expenses will also come from her retirement fund, then increasing the fund by 25% should be able to cover most medical expenses. Maria should also get a life insurance policy with critical illness coverage that will give her a significant amount of money in case she gets diagnosed with cancer, or suffers a stroke or heart attack before the age of 70. That way, her retirement fund is insulated from a catastrophic financial loss.
So what’s the take away?
Start building your retirement fund today! The earlier you start saving, the greater the likelihood that you will have enough funds in the future to survive the longest holiday of your life.
So dear readers, what do you think? Have you started saving for your retirement fund already? Do let us know. Give us your feedback below.