4 Things You Must Achieve Before You Can Retire
Everyone of us looks forward to a comfortable and delightful retirement.
We all look forward to that time when we’ll no longer have to suffer the daily commute or be stuck in the office from 8 to 5 or deal with bosses or colleagues we don’t like.
But are you really ready to retire?
Some of us would want to retire at the typical retirement age of 60 or 65. Some would like to avail of early retirement at 55, while some prefer to retire much earlier, perhaps at 45 or 50.
Regardless of the desired age of retirement, how would you know if you’re ready to retire?
There’s an interesting article published by CNN that tells us about four (4) financial milestones every person should have achieved before retirement.
Here are four (4) major milestones that you should have already achieved before you can really say you’re ready to retire.
Financial Achievement #1:
Save enough to cover 3 months of living expenses
Retirees will have their retirement money in the form of monthly pension or a lump-sum retirement package. So why still be concerned with 3 months worth of living expenses?
The answer: to be financially prepared in case of an emergency.
You don’t know what could happen. A calamity — flood, earthquake, typhoon, fire — might strike destroying your house. A medical emergency might require you to undergo a major surgery. Other unpredictable events could happen, and some of them could require huge amounts of cash.
Thus, you should be ready with an all-cash “emergency fund” that you can tap anytime. This emergency fund gives you immediate access to money which you’ll need in case of an unforeseen event. Preferably, this emergency fund should be at least three (3) months’ worth of living expenses in order not to cause a disruption in your finances.
How to achieve this milestone: Save and park your emergency fund in a time deposit or money market mutual fund or UITF that you can withdraw anytime. Do NOT put your emergency fund in stocks or real estate or other assets that take time before you can liquidate.
Financial Achievement #2:
Own a house
One other financial milestone you should have achieved before retirement is owning a house. Your place of residence should already be an asset, not a liability, to you by the time you retire.
If you took out a housing loan to buy a house, this mortgage should have been fully paid by the time you retire. Otherwise, if you’re retired and you’re still paying the monthly amortization of your housing loan, you might suffer from a financial setback since you’ll have to find a stream of income that will give you cash to pay for the loan’s monthly amortization.
How to achieve this milestone: If you’re going to get a housing loan to buy a house, choose a payment period that corresponds to your retirement age and your ability to make monthly payments during that payment period.
For example, if you’re 40 years old right now, it doesn’t make sense to get a 30-year housing loan. You’ll be 70 by the time your mortgage is fully paid. And if you retire at age 60 or 65, where will you get the money to continue paying the monthly amortizations until 70?
So two things to consider before getting a housing: (1) the number of years before your retirement and (2) your ability to make the monthly loan payments during these remaining years to retirement.
Financial Achievement #3:
Get rid of all debts
A happy retiree is someone who is not tied down by any financial obligations. And a happy retirement is when you’re financially independent — away from all the financial obligations.
Aside from the housing loan in “Financial Achievement #2”, you should have paid off all other debts obligations you have, including credit card debt, car loan, personal loans, and other forms of financial obligations. You won’t be be able to enjoy retirement if you’re still concerned about making the monthly payments to pay off these loans.
How to achieve this milestone: Decide not to get any additional loans, especially if you’re close to retirement age. Regarding your current debts, try to pay them off now one by one.
What you should do is list down all your debts and rank them based on the interest rate. The ones with the highest interest rate are the ones that also suck the biggest money out of you. So decide to prepay or terminate these high interest-bearing loans first.
Warning! Do NOT get another loan just to pay an existing debt.
Financial Achievement #4
Prepare a “nest egg” or fund that could replace 80% of your past income
Retirement shouldn’t necessarily lead to a drastic scale-down of your lifestyle. For this not to happen, you should have access to a steady cashflow that could pay for your desired lifestyle.
Thus, years before retirement, start preparing a “nest egg” or a source of cash that could provide you with at least 80% of your previous monthly salary. This pretty much assures you of a lifestyle that may be the same as the lifestyle you had when you were still relying on your employment income.
Sure, a part of this nest egg could come from your pension fund or retirement package, but if you’re going to rely primarily on SSS (Social Security System) or GSIS (Government Service Insurance System), we’re sure this won’t be enough. Years before retirement, start building a nest egg that could produce at least 80% of the monthly salary you had.
How to achieve this milestone: Save and invest. Right now.
Saving and investing can help grow your money, even if you’re not actively trading or investing. Of course, choosing the best investment option that fits your risk tolerance and investment objective is key.
What investment options are available? To get you started, here’s our Primer and Guide on the investment options available here in the Philippines:
- PERA (Personal Equity and Retirement Account)
- Unit Investment Trust Funds (UITF)
- Mutual Funds
All set to retire? If you’ve achieved these four (4) financial milestones, then yes you might be ready for a delightful and financially comfortable retirement!
Source: “4 financial milestones to reach before you retire.” (CNN)
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