Some of us want to retire at the typical retirement age of 60 or 65. Some prefer to retire earlier, perhaps at 50 or 45 or even 40 years old. Regardless of the desired age of retirement, how would you know if you’re ready to retire?
There’s an interesting article on CNN Money that tells us about four (4) financial milestones every person should achieve before one can decide to retire.
These four (4) financial milestones are things we should have already achieved before we can really say we’re ready for retirement, which means these 4 achievements give us an idea if we’re financially ready and able to retire.
Have you already achieved these 4 pre-retirement milestones?
Financial Achievement #1: Save enough to cover 3 months of living expenses
Retirees will have their retirement money in the form of a monthly pension or a lump-sum package. So why still be concerned with 3 months worth of living expenses, you ask?
The answer: to be financially prepared in case of an emergency.
You don’t know what could happen in the future. A calamity — flood, earthquake, typhoon, or fire — might strike and destroy your house. A medical emergency might require you or a loved one to undergo a major surgery. Other unpredictable events could occur and some of them may require huge amounts of cash.
Thus, you should be ready with an all-cash “emergency fund” that you must be able to easily access 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 equivalent to 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 time deposits or liquid investments such as money market mutual fund or unit investment trust fund (UITF) that you can withdraw anytime.
Do NOT put your emergency fund in stocks or real estate since it is not easy to liquidate or sell these assets. They may be high-yielding but they’re not liquid, which means they’re not easily convertible to cash. It may be possible to immediately sell stocks or real estate property, but at times you’ll have to do that a loss, and of course, that’s not something you want to do.
Financial Achievement #2: Own a house
Another financial milestone you should have achieved before retirement is owning a house. Your place of residence should already be an asset, not a liability, by the time you retire.
If you took out a housing loan to buy a house, this mortgage should have already been fully paid. You should already be free of the monthly burden of home loan amortization. (See also: PAGIBIG housing loan interest rates)
Otherwise, if you’re retired and you’re still paying your mortgage or housing loan, you might suffer from a major financial setback if you find the need to secure a stream of income that can cover your loan’s monthly amortization.
How to achieve this milestone? If you’re going to get a housing loan, 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 the age of 65, which means you won’t have a job providing a stable source of income anymore, where will you get the money to continue paying amortizations until the loan maturity at age 70?
So two (2) things you must consider before getting a housing loan:
- (1) the number of years before your retirement; and
- (2) your financial ability to make the monthly loan payments immediately prior to your intended year of retirement.
Financial Achievement #3: Pay all your debts
A happy retiree is someone not tied down by any financial obligations. And a happy retirement is when you’re financially independent — free from any and all financial obligations.
Aside from the housing loan in “Financial Achievement #2”, you should have paid off all other debts obligations prior to retirement — including credit card debt, car or auto 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, start paying them off now one by one.
What you can 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. This method of paying credit card debt is called the Debt Avalanche method.
The “Debt Avalanche” payment method is particularly useful because you get to first eliminate debts with high interest rates that require huge payments of interest expense. But if you find this method difficult or intimidating, try the alternative method called “Debt Snowball”.
The Debt Snowball method encourages you to pay the smallest amount of loan, regardless of the interest rate. The idea basically is to settle any debt as quick as possible because achieving these “small wins” supposedly motivates borrowers to further pay down their debt. It may not result in lowering the interest expense compared to the Debt Avalanche method, but this could produce a psychological effect that can further encourage you to continue settling your loans.
Regardless if you prefer the “Debt Avalanche” or “Debt Snowball” method, the key is in proactively ensuring that you’re starting to eliminate your debts. 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 current income
Retirement shouldn’t necessarily lead to a drastic scale-down of your lifestyle. To continue the life you prefer, you need to 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 monthly salary. This pretty much assures you of a lifestyle that may be similar to the lifestyle you had when you were still relying on employment or other 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.
How to achieve this milestone? Years before retirement, start building a nest egg that could produce at least 80% of the monthly salary. So save and invest — right now!
Saving and investing can help grow your money, but of course, choosing the best investment option that suits your risk tolerance and investment objective is key.
What investment options are available? To get you started, here’s our Primer and Guide on various investment options available in the Philippines:
- Unit Investment Trust Funds (UITF)
- Mutual Funds
- PERA (Personal Equity and Retirement Account)
- Franchise Business
All set to retire? Let’s recap what you should have already achieved before you can retire rich:
- Financial Achievement #1: Save enough to cover 3 months of living expenses
- Financial Achievement #2: Own a house
- Financial Achievement #3: Pay all your debts
- Financial Achievement #4: Prepare a “nest egg” or fund that could replace 80% of your current income
If you’ve already achieved these four (4) financial milestones, then you’re on your way to a delightful and financially comfortable life of retirement! Happy retiring!
Source: “4 financial milestones to reach before you retire.” (CNN)