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 do you know if you’re ready to retire?
There’s an interesting article from CNN Money that tells us about four (4) financial milestones every person should achieve before one can safely retire without much financial problems. These four (4) financial milestones are things we should have already achieved before we should retire, which means these 4 milestone are something we must work to achieve ASAP if we want to retire rich.
Have you already achieved these 4 pre-retirement financial achievements? If you’re done achieving these financial milestones, then you’re likely ready to retire rich and happy.
- Save enough to cover 6 months of living expenses
- Own a fully-paid house
- Pay all your debts
- Own a “nest egg” that could replace 80% of your current income
Read more about each financial milestone below.
Retire Rich Milestone #1: Save enough to cover 6 months of living expenses
Retirees will have their retirement money in the form of a monthly pension or a lump-sum package. So why be concerned with having several months worth of living expenses, you ask? 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 — especially during this time of the COVID-19 pandemic — might require you or a loved one to undergo hospitalization.
Cost of COVID Hospitalization in the Philippines
How much is the cost of COVID-19 hospitalization in the Philippines? A COVID positive patient racked up a bill amounting to P1.3 million for staying 15 days in a private hospital in Metro Manila back in April 2020, a report by Rappler showed.
Philhealth, fortunately, covered the entire cost back then. However, Philhealth later released their case rate package for COVID patients that limited the payment coverage.
The following maximum amounts will be deducted from the hospital bill or reimbursed for Filipino patients with probable or confirmed cases of COVID-19 and exhibiting pneumonia, a primary COVID symptom:
- Mild pneumonia – P43,997
- Moderate pneumonia – P143,267
- Severe pneumonia – P333,519
- Critical pneumonia – P786,384
It sure is expensive to get COVID so choose to stay safe, practice social distancing, and always wear a face mask and face shield!
Aside from hospitalization, 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.
The CNN Money article suggests to have three (3) months worth of emergency fund, but in the Philippines, we highly suggest that this fund be equivalent to at least six (6) months’ worth of living expenses in order to not cause a disruption in your finances.
How to achieve this milestone? Save and park your emergency fund in time deposits offered by Philippines banks or liquid investments, such as money market mutual fund or unit investment trust fund (UITF), that you can withdraw anytime.
Warning! Do NOT put your emergency fund in stocks or real estate since these are not easy to liquidate. 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 that you want to do.
Retire Rich Milestone #2: Own a fully-paid house
Another financial milestone you should have achieved prior to 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 still paying your mortgage or housing loan, you might suffer from a major financial setback in case you will need 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.
Retire Rich Milestone #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, that is, free from any huge financial obligations.
Aside from the housing loan in “Milestone #2”, you should have paid off all other debts obligations prior to retirement — including credit card debt, car or auto loan, personal loans, and any other forms of financial obligations.
You won’t be be able to enjoy retirement if you’re still concerned about making the amortization payments for these obligations every month.
How to achieve this milestone? Decide not to get any additional loans, especially if you’re close to retirement age. Regarding your existing debts, start paying them off one by one.
How to pay credit card debt: Debt Avalanche vs. Debt Snowball method
What you can do is list down all your debts and rank them based on the interest rate. You can then choose to either pay off your credit card debt using the Debt Avalanche or Debt Snowball method.
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 debt is called the Debt Avalanche method.
The Debt Avalanche payment method is particularly useful because you get to first eliminate credit card with high interest rates that require huge payments of interest expense. But this also means a huge chunk of your cash to be used as credit debt payment month after month. 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 is to settle any debt as quick as possible because achieving these “small wins” can supposedly motivate you to further pay down the remaining 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 encourage you to continue settling your loans.
Regardless if you prefer the “Debt Avalanche” or “Debt Snowball” method, the key is proactively ensuring that you’re starting to eliminate your debts. Warning! Do NOT get another loan just to pay an existing debt!
Retire Rich Milestone #4: Own a “nest egg” 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 cash amounting to at least 80% of your monthly salary. This pretty much assures you of a lifestyle that may be similar to the one 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, look for sources of cash flow and 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 indeed help grow your mone 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 6 months of living expenses
- Financial Achievement #2: Own a fully-paid house
- Financial Achievement #3: Pay all your debts
- Financial Achievement #4: Own a “nest egg” 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!