Money and insurance

How to calculate how much money you need for retirement

When it comes to your financial health, there’s no such thing as preparing too early. Here are factors to consider when projecting how much you’ll need to retire comfortably.

By Mabie Algabate

The reminder to prepare for the future, particularly retirement, has been so overstated that it’s become borderline nagging. Unfortunately, most people still shrug it off as premature. But, as with anything in life, preparation is key to success, so it only makes perfect sense to start as early as possible.

Doctors advise that early detection is best when it comes to your health. This advice extends to your financial health as well. When it comes to generating funds for your retirement, you will find that it’s healthier and more manageable for your financial wellbeing to start when you’re younger and able.

For private company employees, retirement is optional at 60 years old and mandatory at 65. In January 2023, however, the House of House of Representatives approved on third and final reading a bill lowering the optional retirement age for government personnel from 60 years to 56 years.

Speaker Ferdinand Martin G. Romualdez said, “They can opt to quit working, receive their benefits, do other activities, and enjoy life in retirement with their loved ones even before they become senior citizens,” he said, adding that for many employees, retiring early would enhance their wellbeing.

The point is, if you are serious about coming up with an investment plan for your future, here are some tips that can help you break down and calculate how much you will need for a worry-free retirement.

Step 1: Determine when you want to retire.

Figuring out your retirement age is the first thing you need for your computation. It is a rather contentious matter because you’ll need to determine whether you want to retire young or not. The ten years between 55 and 65, for example, can make a huge difference financially.

Retiring at 55

This age puts you in a more advantageous position, physically speaking, because you get more time to freely enjoy the benefits of your life’s hard work. Although certain age-related conditions may already start creeping up on you, you’d still be in generally good enough shape to continue with activities that interest you, such as sports and travel.

Those who want to retire at 55 usually want to free themselves from life-long corporate bonds at the soonest possible time, allowing them time to celebrate living. However, you must be confident that you have enough financial safeguards to sustain your expenses throughout your retirement.

Retiring at 60 and older

Some people delay their retirement for as long as they can. Nothing is wrong with retiring later. Everyone’s circumstances are different. Perhaps they started planning a bit later or they still want to build their funds. For others, being out of employment is out of the question because living costs, regardless of age, can still be burdensome.

The obvious advantage, should you delay your retirement to a later age, is that it’s going to give you more time to prepare for when you do. The longer you put it off, the bigger the output will be for your pension. So, while you may not have as much opportunity to do more of the physically demanding activities, you can still enjoy a lot of alternatives.

Step 2: Identify your source of retirement funds.

If you’re running your own business, you need to determine how much income you’ll be getting from it, and for how many years this amount can sustain you. If you’re an employee, you might have a retirement fund as part of your company’s employee package. Other possible sources may include pension savings, Social Security benefits and insurance policies. Some companies even offer stock and bond options that you can fully maximize when you retire.

Upon identifying these funds, you can then project how much you’ll have for every year that you’re in retirement. Break that down even further by estimating your spending for daily costs. It’s a fair assumption that inflation rates would affect prices in the future, so it’s best to compute for a higher cost of living.

Step 3: Calculate what you need.

Inevitably, there will be a difference between your expected retirement income from various sources and your actual retirement expenses. You’ll need to know this difference to have a clear picture of how much you will need to save for retirement.

For example, if your estimated annual expenses for your retirement is PhP1 million and you have a PhP700,000 guaranteed income, this means you have a PhP300,000 difference or gap. This gap is what you need to fill to complete your annual retirement fund. It can come from your savings or retirement fund, or even insurance with investment component you can invest in early on such as plans from FWD Life Insurance like Manifest and Set for Life.

You then have to multiply this amount by the number of years you expect to be in retirement to find out how much you need to prepare and save up for. Schedule a financial planning session here to get expert advice on how to prepare and plan for that retirement you can enjoy.

This article is part of a comprehensive series titled “Retirement Planning 101: A 5 Step Guide to Securing Your Future”. The series aims to provide you with valuable insights and practical steps to plan for your retirement effectively.