Ensuring your retirement income

RETIREMENT is something we should look forward to with much anticipation and excitement. After working hard for decades, we deserve a life with less stress and more choices. With work behind us, we can look forward to engaging in activities we have long set aside. We can also pursue advocacies that really matter to us. However, our ability to do what we dream about in retirement largely depends on our resources, specifically our retirement income.

Traditionally, retirees rely on social security, company-sponsored retirement plans and own savings to fund their retirement lifestyle. Additional sources include support from the children and income from a business.

Social security, while a dependable source right now, is not designed to fully cover a retiree’s expenses. Recent data show that the average monthly pension from the Social Security System and the Government Service Insurance System are P5,123 and P18,525, respectively. Note that the amount is not inflation-adjusted, so purchasing power declines over time. Also, its long-term sustainability is a concern.

On the other hand, more companies are now shifting from defined benefits to defined contribution retirement plans. A defined benefit plan provides a guaranteed retirement benefit while a defined contribution scheme does not as it is subject to the performance of the fund where the employee’s contribution is invested. Also, since workers are more mobile now, they may not be able to accumulate a sizeable retirement fund since pension benefits are not portable.

In our culture, many parents still expect their children to support them during senior years. While this reflects our close family ties, this practice adds more load on the weary shoulders of the children already burdened by the weight of raising their own family. It is likely that anything allotted for the older generation is something taken away from the younger generation.

Some look at their business – either already ongoing or just starting – to provide them the income during retirement. This is a viable source but has risks attached to it. We just consider the many businesses that were badly hit and even had to close due to the pandemic. Clearly, income from this source disappeared. Fortunately, there are businesses that are thriving even during the crisis.

It is best that we make an assessment of our likely sources of retirement income way before we plan to stop working. Five years ahead may be a good time. This way, we will know how much more personal savings we need to build up to ensure we will have enough funds in retirement. Let us not commit the mistake of assuming we will have enough. Very often, what we think is sufficient, is never enough.

For example, if your desired standard of living in retirement will require P100,000 monthly, check how much of that can come from social security and from your company retirement plan. Best not to expect any support from your children who are pursuing their own dreams. Is there any dependable income from a business or other assets? Whatever gap left must be covered by personal savings. Making this determination ahead of retirement will give you time to ramp up your savings and investments to bridge that income gap.

Personal savings has become the major source of retirement income given the limits of social security, the shift in company retirement plans, the changing dynamics in the family and the unpredictability of business income. Personal savings include savings and investment products, life insurance, assets or properties that provide income and contribution to the government-initiated Personal Equity and Retirement Account program.

Getting financially ready for retirement takes some serious effort and objectivity. A good first step is taking the initiative to learn more about it. A lot of materials can be obtained online as useful reference. To achieve an impartial assessment, it is better to consult others who can help you thresh out your unique situation to come up with a very good plan. Life insurance companies and banks, for instance, have well-trained professionals who can help you in this process.

With improving life expectancy and advances in medical care, retirement can be at least another 25 years. Ensuring you have a dependable source of retirement income will make those years truly memorable.

The author is former president and CEO of two life insurance companies, AIA-Philam Life and BPI Philam Assurance Co. He was also the president of the Philippine Life Insurance Association. He is an advocate of retirement planning, personal leadership, gender diversity and inclusion.