By elmads

Growing old is an irreversible part of our lives, it is a natural law and order. Beings in this world will have their own time to pass, some will have a shorter lifespan while others longer.

The time it takes to reach the declining slope of our physical and mental form will vary in each and every one of us. It actually sounds depressing when we think about it, that is why 9/10 people are not looking forward to old age. This holds true because almost everyone is either afraid to reach the later part of their lives or just disregard this idea. Not to mention how we imagine growing old looks like, such as having wrinkled skin, forgetting things, slow mobility, probable medical illnesses and diseases. Plus, the stress of thinking how to finance ourselves to sustain our remaining lives, and what will we do upon retirement.

Nevertheless, getting old and going into retirement should actually be the very best years of our lives, which is a perspective that a few us have. It should be a life in which we can do things that make us happy while enjoying the abundance of what we have planted during our working lives.

Retirement is defined as the action or fact of leaving one’s job and ceasing to work, usually because you are old. This is a word that majority of people associate and correlate with old age. Most countries have a retirement age of 60-years-old and above which has been the benchmark for almost a century already. Also, it is expected that the retirement age might reach 70-years-old after 1-3 decades.

That being said, most of us leave our faith in the hands of our government to sustain our old aged lives, which will be undeniably one of our largest mistakes of our life. Here in the UK, the flat rate pension that people will get upon contributing 35 years to the government is around £150-200 a week, which is £800 a month and 10,000£ a year. If you live in the UK and do the math now, how much do you actually spend in a month or a year? Will this be enough for you? for others, maybe it is a yes while for some it is a no. Nonetheless, this is only an ample amount to live with, especially if you have been used to live a lavish lifestyle.

Everyone must plan for their elderly lives because we do not want to be a burden to our children or future children. Living an independent financial life without expecting someone to help us is one of the best gifts that we could give to our loved ones and ourselves. This is why retirement planning is an essential part of our financial goals. In this blog I will guide you to the simple steps that we can take in order to make our own retirement plan.

The Steps

1.) Know what are your debts to be paid and other financial responsibilities – In here, I pertain to long-term debt specifically, mortgage loans. Most of us regular individuals who took a mortgage loan will be paying it for 30-35 years on average. “Do I think that once I reach retirement age, I have fully paid my mortgage loan already?” if yes, then that is great, but if not then we have to take note about it. Other long term debts can be business loans and car loans.

In addition, we need to consider our children and/or dependents. We need to ask this question to ourselves, “Do I think by the time I retire, my children will be financially independent already?” I hope the answer will be yes, because if not, this will be a massive factor that needs to be included in our retirement planning.

2.) Know what are your chosen lifestyle upon retirement – It is crucial to know this, as it will dictate how much will we need to sustain our entire retirement lives. It is actually a tricky and an arduous task, because this will be personal for most of us. Here are the things that we can ask ourselves.

• Our current lifestyle – Know particularly how much is our essential expenses, and the average of our non-essential expenditures (If you do not know how to start it (I encourage you to read my blog titled “Why spending habits is important before saving money”) in a month then zoom it out into a year. You can remove the expenses for your children and mortgage, because it is highly possible that most of us are finished paying for these already. Nevertheless, if we think that we will still be paying for it, then it is safer for us to just include it in our lifestyle expense computation.

• Our planned and projected lifestyle – “Do you plan to live lavishly? like, traveling around the world yearly, having a Ferrari car, or a yacht or a private jet? or you just want a simple lifestyle?” It all depends on that, because the lifestyle we will live in the future will also have a corresponding amount of money needed for it to be sustainable.

3.) Know where you want to settle – This is also vital, because some people would want to live in another country. This is very popular in today’s age because of globalization. People find places where they find suitable to live in, depending on their own preferences. For example, Some immigrants from the US or UK will still prefer to go back to the country where they where born into and spend the rest of their lives there, or some people would love to retire in a different nation maybe because of the weather, nature or something else.

• The largest factor that we have to consider in this category is the exchange rate of currencies, because first world countries have significant amount of exchange rate compared to 2^nd and 3^rd world countries, which may indicate a better buying power. For instance, if you retire today in the UK with £500,000 and you want to settle in the Philippines, that amount will be currently at 33 million PHP as per October 2022 exchange rate. That amount of money is remarkable enough to sustain 10-20 years of retirement life in the Philippines, but this will still depend on the a person’s lifestyle.

• Furthermore, we need to take into consideration the tax of the country or state/province we want to live in/retire. This is because taxes in other countries can be lesser than some. As an example, the value added tax (VAT) for goods and services in Qatar is at a standard rate of 5%, whereas most countries are at 20%. So, if you spend £10,000 a year for goods and services then £2,000 of that will be for VAT, while if you live in Qatar, it will be just £500 (in theory). This just means that GBP brought into Qatar will be able to buy more goods and services, because the tax in the said country is less than others.

4.) Estimate up until what age you will be living your lives, your life expectancy – This asks the question “What age do we think we will reach before we pass away?”. Are you uncomfortable again thinking about this? I hate to be a buzz kill, but no one is immortal here. That is why everything is planned as what generally will happen in our lives, whether we like it or not. We can estimate our life expectancy based on data that are presented to us by our country’s statistics office or we could just search it online. To give you context, in the UK, the average life expectancy is 80 years of age, in the US it is 76-81 depending on the gender, while in the Philippines it is 69-72 also depending on the gender as well.

5.) Project your possible income from today up until retirement age – This is absolutely a daunting task because projections are always wrong, there is no one in this world who can forecast the future with 100% certainty. You might be asking yourself, why then is this included in the steps? To be honest to you, I added this to give us a realistic view of the future we want, while having the realistic view of the life that we have today. Don’t worry, I will explain this in a deeper sense when we reach the computation part of this blog. The data we need to know are the following;

• Our current age
• The age when we want to retire
• Our current salary.

The basic steps I cited, or shall I say questions that we need to ask ourselves are the important bits and pieces for us to arrive into an approximate amount of money we need for our retirement. The sole purpose of knowing the amount we need is for us to be able to invest and grow our money with a specific basis. Just like what I said in my blog titled “Basic Financial Planning Part 1”, under Goal settings section,

“Don’t tell me how much you need, tell me what are your objectives, it is by then we will know how much money you will need to achieve your financial goals” in this case, retirement.

Evan Louise madriñan

Again, I’ll not leave you hanging how to do this. I’ll show you my dear readers an example, to give you a guide on how to construct this for yourself. I’ll be making a scenario and a computation utilizing excel spreadsheet for it to be understandable.

Here is a simple and realistic sample scenario: Married with two children, both have the same salary pay. This is in the perspective of one person which is the wife/mother of the family, we’ll just call her Eyah.

Age

Current Age: 30-years-old

Planned age to retire: 65-years-old

Expected age to live: 85-years-old

Number of years to grow money: 35 years

Number of years to sustain the retirement life: 20 years

Salary and Saving

Current Net Salary per month: £1,500

Amount saved for retirement per month: 5% of salary = £75

Expenses

Current family household expenses : £2500, Eyah pays £1,250 as half part of the expenses while the husband pays the other half. (2,500 is the average household expenses in the uk, see the given link for your reference Family spending in the UK – Office for National Statistics (ons.gov.uk), and Family spending in the UK – Office for National Statistics (ons.gov.uk) )

Remaining money from net salary after deductions of retirement savings of £75 and £1,250 of household expenses: £175, which will be used for personal and family wants expenses.

Retirement plan

• With mortgage but fully payed already upon reaching retirement age, children have their own lives and all debts are paid.

• Simple life, just enjoy to travel once a year into a different country (the average travel expenses in the year 2020 pre pandemic was £800 weekly, which is £3,200 monthly)

• Will retire in the same country where they are currently working, in this case in the UK.

The family expenses are now £1,000 from £1,250 per month because by that time all responsibilities are now paid off and children will have their own lives. As the illustration above shows, the estimated monthly expenses need to be multiplied by 12 to make it a year, then multiply it again to the number of years we expect to live. In this example it is 20 years because Eyah’s chosen retirement age is 65 while her expected life expectancy is 85 years of age.

So, what will be the total savings amount of money if we assume that the salary of Eyah continues to be £1,500 until retirement age? We know that Eyah saves 5% of her salary monthly which is £75, we then need to multiply it by 12 to make it a year. Afterwards, we need to multiply it by 35 years because this is the number of years Eyah will be working until her chosen retirement age, which 65.

We can see that Eyah only saved £31,500 worth of money for 35 years, but she needs £304,000 worth in order to survive the life that she wants until age 85. The other step that Eyah can take is to invest her money.

The Illustration below shows the difference of saving money and investing to compound her money. Let’s see if Eyah will be able to target her retirement goals with the amount that she saves. The investing strategy I used here is the Passive index fund investing, in which Eyah invests religiously every pay day and just buy & hold the index fund that she purchases up until she retires.

Unfortunately, Eyah is still short of £179,586.81 worth of money, but as you can see, if she did not invest her money and just saved it, she would just have a small amount of £31,500. That being said, will this be the end of the line for Eyah to reach her retirement financial goal of £304,000? the answer is no. It can still be adjusted by trial and error computation and through playing the variables of her budgeting method. If Eyah could save more than she can spend for her family’s personal wants and expenses, then that would be great. See another perspective of the possible budgeting strategy that she could take.

This is now the new budgeting strategy that EYAH could take to reach her retirement financial goals. As depicted on the two above illustrations, Eyah decreased her spending from £175 monthly for her personal and family expenses to £50, while increasing her retirement savings from £75 (which is 5% of her net salary) to £200 (which is 13.33% of her net salary). With just this simple adjustments we could already see that monstrous and monumental growth of her money when done consistently and religiously. The £304,000 will not just be reached but will even be superseded. Eyah will have an additional £27,768.51 more upon retiring, only if she invests her money and does it properly.

Furthermore, In my scenario, as you have noticed there is no allocated money for emergency fund, this is the hardest part of budgeting money. We need to prioritize things based on our needs, if Eyah could just lower down more her family’s household expenses in order to save an ample amount of money for their emergency fund, then that will be great for them.

In the end safety and security should always be the focus of parents for their family. I have both discussed this in my blogs titled “Why knowing our spending habits is important before saving money”, “Saving money for safety and security” and “Budgeting strategies for everyone”.

This is just a very simple scenario. There are various factors and probabilities that can happen in our life, this is why financial planning is a personal matter. There is no one size fits all blueprint in doing a financial plan and financial budgeting for yourself and your family. That is why knowing your goals, objectives for the present and the future is essential. Plus getting to know more of ourselves will is a very important matter that only few individuals talk about.

In addition, I know some of you are sceptical about my scenario, because it is very hard to do for the most of us. That is why finding ways to increase our salary and/or additional sources of income are important. Boosting our overall salary is one of the key elements to attain financial freedom, plus having a great budgeting plan and sound risk management method.

To Sum It Up

If you have a large amount of salary per month, I do implore you to be strategic, wise and learn to save and invest your hard-earned money. But if you just have an ample amount of money per month, then please find ways to increase it or expand your income sources to boost your earnings power. Work hard, play hard and always have a positive perspective of yourself and in life.

Retirement planning is hard to do because of the various components that need to be considered. We always need to have the most conservative assumptions of these factors in order to be, as much as possible near accurate into our projections.

Having more debt, unexpected expenses and life changing events, will completely shatter our patience, consistency and confidence to continue to save and invest our hard-earned money to achieve our own retirement goals. Nevertheless, we must find ways to overcome such hurdles in our lives, we must do things not just for ourselves but also our family’s comfortability and fulfilment.

Our behaviours and choices will dictate our own future. What we will achieve tomorrow will be the fruits of our hard work, discipline and labour of today.

Knowledge is my Sword and Patience is my Shield,

Evan Louise Madriñan / elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.