I was having this conversation with a colleague of mine about my plans on investing on the stock market for quite some time now. He is employed as a Safety Officer in our company earning a net monthly income of PHP 15,000.00.
He was amazed on the information I shared to him about the possibilities of owning large companies by buying its shares and wealth accumulation through capital appreciation and dividends. He was really getting motivated until one day, he said to me that he would like to join me in this quest for financial independence.
And then I asked him, “What made you decide to try to start investing?”
He said to me, “I want to accumulate enough money to save for my family’s retirement.”
I then asked, “And how many years do you plan on investing and how much are you willing to invest every month?”
He put up a quick grin and asked me, “I’m planning to retire at 60 years of age, is it possible to reach a million pesos in 14 years by just investing PHP 2,000.00 every month?”
I said to him, “I don’t know, but let’s find out.”
I immediately went to MSN Money and used the financial calculators found on that site and at that instant, I became his financial adviser for that day (LOL!). I told him that we will assume a present value of his invested money to be PHP 5,000.00 since the opening balance of a COL Starter account is PHP 5,000.00. I also told him that we will assume a 10% annual interest rate which is historically proven by past technical analysis charts. The interests will be compounded yearly and the amount invested will be PHP 2,000.00 monthly.
To summarize, here’s the data we’re talking about;
Present value of investment: PHP 5,000.00
Target future value he want’s to achieve: PHP 1,000,000.00
Monthly investment: PHP 2,000.00
Annual interest rate: 10%
Compounding: yearly
The results suggested that he needs to invest for 17 years and 1 month. That is investing for 14 years plus an additional 3 more years and 1 month. If he would start today, he should continue doing so until July 12, 2032. He would be 63 years old by then. Based on the findings, if he will adjust his monthly investment to specifically reach his 14 year time frame, then he would need to invest PHP 2,922.00/month.
When he saw this figures right before his eyes, his hopes for an abundant retirement came whispering in his mind.
I said to him, “There’s still hope, LOL! But what if there’s a market crash or a financial crisis happening on the exact time you want to close your position and lock in your gains?”
He looked at me puzzled not knowing what to say. Then I said to him, “You would lose a substantial amount of money if you do that! But let’s say that you will not invest and just save your money until retirement day, how much do you need to save?”
Still looking puzzled, I then looked up again at the calculator and input the data below;
Current annual income: PHP 180,000.00
Current age: 46
Retirement age: 60
Life expectancy: 85
Current savings: PHP 0.00
Desired annual income after retirement: PHP 180,000.00
Annual investment return
Pre retirement: 5%
Post retirement: 5%
To have a minimal and realistic result, we made his desired annual income after retirement the same as his current annual income. This just means that after he retires, he would still be spending PHP 15,000.00/month on his living expenses. The results suggested that he should save PHP 10,787.00/month so that once he retired at age 60, he could live comfortably until the age of 85. What this actually means is that he should stop paying all his bills, stop his kids from going to school, they should also downsize and live under a bridge or beside the railways and learn to live off with just PHP 4,214.00/month.
When I showed him the figures, we burst into an endless laughter. I even joked at him that he should take his family and start living on Anawim. But this is the truth. To put up that kind of amount into his retirement account, he should put up a business that earns that amount or get a drastic salary increase equaling to that amount. But that’s easier said than done.
So the question still remains, how do you save money for retirement?
I cannot think of any answer that will astound you rather than just tell you the importance of saving early. If for example you started to save at the age of 21 with the same data above, you would just need to save PHP 1,853.00/month instead of the PHP 10,787.00/month. That’s a huge difference.
The moral of the story is to start saving now, not tomorrow, next week, next month or next year. Start now and make it a conviction to automate it in your life.
Now for those that are now starting to save for retirement, you may want to ask where should you place it? In my humble opinion, Money Market funds, Bond funds, Certificate of Deposits or just a simple savings account will do. If you want to invest your retirement fund, place it in a Money Market or a Bond fund. These type of funds are very liquid and have low risk compared to equity funds. You may want to ask for banks that offer such investment products. In Banco De Oro, there’s the BDO Peso Money Market Fund and BDO Peso Bond Fund. You may want to visit their site for more information. If you do not want risks involved, then buy Certificate of Deposits. The bank will give you a guaranteed rate for a specific time and they’ll insure that rate. Or just a simple savings account will do that will give approximately 1% annual interest rates.
For my strategy, once my retirement savings account reach PHP 10,000.00, I’ll have it invested to BDO Peso Bond Fund. I’ll do this every time my retirement savings account reaches PHP 10,000.00. To achieve this, I save 5% every month from the 70% of my monthly net income.
The reason why I’m placing it in an investment product such as this is to beat or at least cope up with inflation. In the Philippines, average inflation rates are 5% annually. If my retirement fund can grow by 6% annually, the buying power of my money remains the same.
Whenever I spend time talking to my colleague about this subject, I see hope in his eyes. Even if he is 46 years old, it isn’t too late to plan for his future. If he can tolerate the risks and can set aside his emotions, investing PHP 2,000.00 on the stock market may be his way to achieving his retirement plans.
Happy saving!