## Tuesday, March 26, 2013

### Do You Save Enough for Retirement?

According to this article from Rappler, most likely not.

You can estimate how well you're doing easily enough. With your monthly disposable income (that is, your monthly salary minus taxes, SSS/GSIS, Pag-Ibig, and PhilHealth contributions) and usual monthly expenses, start by computing for how much you can save in one year. For example (all figures in pesos):

Monthly disposable income = 30,000
Annual total income (including 13th month pay) = 30,000 * 13 = 390,000

Monthly expenses:
• Rent and utilities =  10,000
• Food = 300 per day * 30 days = 9,000
• Transportation = 100 per day * 30 days = 3,000
• Total per month = 22,000
Total annual expenses = 22,000 * 12 = 264,000

Total annual savings = 390,000 - 264,000 = 126,000

Implied savings rate = 126,000/390,000 = 32%

Is saving 126,000 per year, or 32% of a 30,000 monthly income, good enough for retirement? Let's see.

Say "Popoy," a person with the above income and expenses, is 30 years old today, is planning to retire at 60, and is likely to live until age 85. Assuming he plans to spend the same amount--22,000 per month--from retirement til the day he dies, how much will his savings at 60 years old take him?

(126,000 per year * 30 years to retirement) / 22,000 per month = 172 months or 14 years

It seems that Popoy's saving habit will only take him 14 years into retirement, and his savings will fall considerably short of his needs. Are you doing better or worse than him?

Of course, the above example is very simplified as it ignores important factors that may alleviate or magnify the savings burden of a person like Popoy. Aside from those used above, what other factors should we consider in order to have a more realistic and useful analysis? I would love to hear your thoughts in the comments section below. At the end of the month, I will show you a model/tool that will help you come up with a better analysis.