Will you outlive your money? 1

Will you outlive your money?

Aneth Ng-Lim

Posted at Nov 01 2021 04:05 PM

Apart from remembering our dearly departed loved ones, All Saints’ Day is also a time when we are reminded of our mortality. When it comes to money, this is a good opportunity to consider if you have saved enough for your retirement, as well as secured your family’s financial future should the unexpected happen.

I recently came across this thought-provoking question from CNBC.com: “Will I outlive my money?” While I wish I could confidently say I hope not, the reality is that the future is uncertain. 

You may think you have enough money today but then inflation could be your enemy. It’s also possible that two years ago you could say No, but after COVID-19 has ravaged economic markets around the world, your answer may have changed.

While no one can know for sure when his or her time will be up, you can plan to live to a ripe old age of 70 or 80 and take the steps to make sure you don’t outlive your retirement savings. Here are three key money strategies that may help.

#1 Follow the 50/15/5 rule for expenses and savings

This rule can work whether you are an employee or running your own business. The good thing about this monthly budget rule is that it can help you manage your money now and also meet your long-term saving goal for your retirement.

Here’s how: (1) spend 50 percent or less of your income on needs such as food, transportation and housing; (2) save 15 percent into retirement accounts that may be tax-free or matched by your employer; and (3) tap into 5 percent or less for emergency needs which if not used should be saved towards an emergency fund.

In case you are wondering why 50/15/5 only add up to 70 percent of your income, that’s because you can use the 30 percent as a reward for your hard work. You can travel, dine out, even get a new wardrobe. And this is why this rule can work for anyone. It has a 30 percent room for cheating because people do need a break.

Let’s say your take-home pay after taxes and all other mandatory contributions is P30,000. Use the half or P15,000 for your needs, and you still have P9,000 for your wants. Make sure to set aside P4,500 for your retirement savings and you can consider adjusting your Pag-Ibig contributions to the maximum P5,000 for this. The best part is not only do you save but your Pag-Ibig contributions up to P5,000 are also tax-free. Finally, you have P1,500 for emergencies and if there are none then put that into your emergency fund.

#2 If numbers don’t work, you can try the bucket or pot strategy.

One reason many people do not have a budget is they do not like tracking their expenses and savings, plus Math bores them. If this fits you, then consider the bucket method or the pot strategy.

You can make a list of your spending and saving into buckets or pots. Your buckets or pots can be short-term or long-term. They do not have to be literally buckets or pots, and can be different accounts where you park your money separately, or different electronic wallets. 

Personally, I use Excel and each pot is one worksheet so let me use it as example. I have a pot for household expenses and I draw from that pot what I have to spend for groceries and utility bills. I also have a pot for treats and that can be spent for salon visits, or shopping for bags and shoes. I also made a pot for new gadgets such as phones or tablets. 

It takes me between 18 to 24 months to fill that up and then I can upgrade to a new model without feeling guilty. I used to have a pot for travel to fund family vacations but no thanks to COVID-19, that pot is full and waiting to be spent.

It pays to be fairly strict with the retirement pot and emergency pot, as this has helped me sleep better at night even when we experience family emergencies.

#3 Use the 4 percent rule on your first year of retirement

This is a 20-year old rule that came from retired financial advisor William Bengen and according to CNBC.com, this is still in circulation.

The rule is simple: in your first year of retirement, withdraw 4 percent from your savings to cover your needs and wants. After that, you can adjust that amount for inflation every year.

A quick lesson on inflation – this is the rate at which the value of a currency is falling. So when they say that our 2021 inflation is forecast at 4.4 percent, that means your money will lose 4.4 percent of its value this year. 

Imagine if your savings is P1,000,000 and your interest earned is 1.5 percent. Your interest does not even cover half the inflation so you still come out at the losing end with your P1,000,000 now worth just P970,340. Inflation will continue to erode your money’s value unless you can get higher returns to outpace it.

By withdrawing only a small portion of your retirement fund, you can continue to get returns, and better if these are higher than inflation. This way, you can stretch your savings as long as possible and going back to our headline question, you can answer No more confidently.


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Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.