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How much do I need to retire?

Ariel G. Cantos - 16h ago
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I F you ask this question, you deserve a pat on the back. Only a small minority

thinks about retirement early enough. This is something most people fail to do
and thus, put their golden years at risk.

The proverbial answer to this question is, "It depends."

How much you need to retire depends on a number of things: the lifestyle you
envision when you retire, when you plan to retire, years in retirement, your health
status and special projects you may wish to pursue. Simply picking a random
number will not do. There is a process that can help you determine the amount
you will need.

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What is your desired lifestyle, how do you see life in retirement?

Determining how you intend to spend your time, what you plan to do and what is
important to you will help answer this question. This covers your basic living
essentials, leisure and travel, hobbies, interests, advocacies and other pursuits.
When you have a good picture of that retirement lifestyle, you will need to
estimate how much that will cost. Let us assume that your envisioned lifestyle in
retirement costs P1.2 million a year today.

When do you plan to retire?

The time you retire will impact how much you will need. If you plan to retire this
year, your annual budget of P1.2 million will buy more than what it can 10 years
or 20 years from now. At an average 4-percent inflation, the purchasing power of
your P1.2-million budget today will only be P810,000 (67.5 percent) and P548,000
(45.7 percent), 10 years and 20 years from now, respectively. This means the
later you retire, the greater amount you need. For instance, to enjoy the same
standard of living that a P1.2-million annual budget today gives you, you will need
a P2.6-million annual budget 20 years from now, using the 4-percent inflation
rate.

How long will you be in retirement?

The answer is determined by when you plan to retire and how long you will live.
Let us say that you plan to retire by age 60. To help estimate how long you will
likely live, you may try online life expectancy calculators. Let us assume that
based on the answers you put in the life expectancy calculator, your estimated
life expectancy is computed at 85 years. Now, using these two numbers — 60
(age to retire) and 85 (estimated life expectancy) — you may look forward to 25
years in retirement.

Do you expect other major expenses in retirement?

You may plan for big purchases during retirement. Projects like a vacation home,
contribution to a charity or leaving a legacy when you pass are a few examples.
Also, you may need to allocate a separate amount specific to health care since
this is a major expense as you get older.

Armed with relevant information, you can better prepare for the amount you may
need for retirement. Note though that no process can predict exactly what you
need. There are a lot of moving parts. But, going through this process and
seeking professional advice will increase your chances of enjoying your
retirement.

How much do I need to retire?

Using the above data, the annual cost of your dream retirement lifestyle in
today's prices is P1.2 million.

You plan to retire at age 60. That is 20 years from now, assuming you are 40.

With a 4-percent average annual inflation, your desired lifestyle will cost P2.6
million annually by age 60.

You estimate to live 25 years in retirement.

Using the "Multiply by 25" rule of thumb for retirement savings, we multiply the
P2.6 million by 25. The product is P65 million. This is the amount you may need
by age 60 so you can fund your dream retirement lifestyle and have some
confidence your money will last. Note that this amount does not include any
provision you will have for any special projects or major medical expenses.

It is important to remember that the amount you need will change over time.
Hence, it is best to do this exercise regularly to account for major life events.
Consulting a financial adviser will also help immensely given your unique
circumstances, movements in assumptions and the changes that will likely occur
through the years.

Lao Tzu said that a journey of a thousand miles begins with a single step.
Similarly, effectively planning for your retirement, which can be many years away,
begins with the step of determining the amount you may need to have a happy
one.

Ariel G. Cantos is the former president and CEO of two life insurance companies,
AIA-Philam Life and BPI Philam Assurance Co. He was also the president of the
Philippine Life Insurance Association. He is an advocate of retirement planning,
personal leadership, gender diversity and inclusion.