Not saving enough for retirement is a common problem, even in America.
Saving for retirement is not taught in schools and, because it is of no immediate concern, people are not interested in it.
But what does retirement mean? It can actually mean different things to different people.
Some may be planning to do volunteer work in organizations important to them. Others may look forward to traveling. Still others may wish (or need) to work part-time.
Whatever retirement means to you, the bottom line is you will no longer have your primary source of income—a full-time job.
But while you no longer get paid a regular salary, you will still have expenses to pay. Most likely, you will rely on your Social Security pension, retirement accounts like 401-Ks or 403-Bs (if you have not done so yet, avail of them if your company offers them), IRAs and Roth IRAs (which you can open with investment companies) and any other savings you may have set aside.
Some people may receive financial help from children or other relatives. Unfortunately, there are people who will not have any of these financial options, so they have to continue working to support themselves.
How much money do you have to save for retirement?
Here is a simple formula to help you find out if you have enough money for retirement, even outlive your retirement money. You can use the formula with any currency.
I worked on this simple Mathematics problem for a friend who is 40 years old.
First, I asked him how long he thought he would live past retirement age of 65 years old. His grandfather died at the age of 92 and his father is still alive at 76. He estimates he will live up to 90 at least.
This means he has to save money to support himself for 25 years after retirement (i.e. 90-65=25).
I then asked him to estimate his monthly expenses. To make things simple, we did not take into account the effect of inflation (but it is important to consider inflation when drawing up retirement goals, which in the United States averaged 3 percent in recent decades).
He estimates a prudent monthly budget of US$2,000 (by American standards). We then multiplied that by 300 months (i.e. 25 years x 12 months = 300 months).
He has to save $600,000 for his retirement to meet his monthly budget.
Luckily, at 40 years old, he has already $100,000 in his 401-K, $25,000 in bank savings and $25,000 in IRA. The total retirement money he has so far is $150,000.
Since he needs $600,000, he still has to save $450,000. He has 25 years (300 months) to save, so he has to set aside $1,500 every month for his retirement.
It may seem impossible to save $1,500 every month but it is actually not very difficult since interest on his 401-K and IRA is compounded regularly.
It is easier to reach your goal if you take advantage of savings with compounded interests and invest in interest-bearing accounts or stocks.
And since my friend still has 25 years to go before retirement, he can do something now to cover prospective shortfalls.
If my friend starts putting $300 a month until his retirement in an instrument with, say, a 5-percent return, it will add $179,697.30 to his nest egg. The $150,000 in his 401-K, if it continues to grow at 5 percent, will be worth $522,193.57 upon retirement even without him adding to it.
The $25,000 in IRA account, with returns of five percent, will be worth $87,032.26 at age 65 (Compound Interest Calculator at www.investor.gov).
His savings of $25,000 in a bank, for diversification purposes, may not have high returns (i.e. average 1-3 percent), but it will still help him increase his nest egg.
I assigned a random five percent return in the example, although I know that, historically, stock returns are at 9-11 percent, investments in bonds are at 5 percent, while bank returns are 1-3 percent.
You have a number of investment choices at your disposal. So save while you can, be consistent and let the power of compound interest do the hard work for you.
Disclaimer: The information in this article does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific professional advice. It is recommended that you obtain your own independent professional advice before making any decisions in relation to your particular requirements or circumstances.
(Roman Corpuz is a clinic director for a nonprofit organization in Washington. He teaches immigrants, refugees and asylees how to become self-sufficient through various programs like microfinance and financial training. He studied Economics in the University of the Philippines and used to work for the Senate of the Philippines as a legislative officer. For questions, e-mail him at romancorpuz@ gmail.com)