Retirement Planning In Your 40s
If you are in your 40s now, you may be near the peak of your career and retirement seems a distant prospect. However, you must face the reality that you are halfway through your career life. In fact, you should have started saving for retirement even when you were just in your 20s because the longer you put it off, the more difficult it gets to attain your target.
With the variety and complexity of financial options, I would recommend availing of the services of experts in personal finance since this is such a crucial part of your life. Still, if you prefer to do your retirement planning on your own, here are my suggestions:
Estimate the cash you will need to retire in the lifestyle you want. To do this, you need to arrive at two estimates. The first is to estimate your probable maximum life. This may sound morbid, but if you are to have a good plan, you must have a good forecast of your mortality. With the advances in medical treatment, more and more people are living well into their 80s and 90s. Many of them have outlived their savings and are dependent on their children for support. Because of this, it would be best to consider the possibility of living a longer life than the usual expectation. Second is to have vision of how much savings you need to live a comfortable life.
Increase the amount of your income that goes into savings for retirement. For most people, their 40s are the age when their careers are near their peak income. This should be taken as an opportunity to accelerate the deposits into their retirement fund. Unfortunately, this also often coincides with the age wherein their children go to college. Still, for those who have planned their finances properly, the bulk of expenses for their kids’ college education would have come from an earlier accumulated college fund.
Have a great health care plan. In budgeting for health care, there should be more allocation to having a good health plan. Until illness strikes, most young people take good health for granted. However, your 40s is the age when serious illness can develop. Some treatments are extremely costly and having a health plan would go a long way to save on medical expenses.
Get sufficient life insurance. How much is enough depends on many factors. If you have dependents that would suffer financially in case of your untimely demise, then it is a necessity to have enough insurance for their needs. This is especially true if you have kids who are still studying or if your spouse is not working. To be able to properly buy insurance, you must understand how it really works. Learn as much as you can about life insurance, what type you need and how much coverage you should get. Do not just rely on the sales talk, you must read and know about a policy’s fine print.
Take advantage of tax breaks. Tax breaks are usually done to encourage long-term savings or to assist certain sectors of society like OFWs. Here in the Philippines, one of the most common of these is the withholding tax-free status of some types of deposits if they are not withdrawn for at least five years. This has a tremendous effect because the withholding tax on interest on deposits currently stands at 20 percent of the interest. Another tax break suitable for retirement plans is the PERA (Personal Equity and Retirement Account). Unfortunately, you are presently limited to only up to P100,000 annually or, if you are an overseas Filipino, up to P200,000 a year. But check if the limits have increased. Always be on the lookout for investment vehicles or policies that are given legal tax breaks.
Adjust investments for greater stability and liquidity. I make this suggestion assuming that you have an investment portfolio that was designed for people in their 20s and 30s. The older you get, the more conservative your asset allocation should be. The reason for this is that the time when you will be needing cash for your retirement expenses is becoming nearer. You would be at a substantial risk if you invest too much in volatile investments like stocks. You may be caught in a stock market crash that takes decades to recover from. Real estate holding must not be excessive either because they are hard to liquidate quickly without losing much of their value. Nevertheless, being too conservative has its disadvantages. Your investment gains may not be sufficient to offset inflation. Most financial experts advise a balanced approach for people in their 40s.
Consider retiring in the province. There are thousands of foreigners that have chosen to retire in the Philippines because of the lower cost of living. For us here, a similar option is to retire in the province. Not only is it less expensive but the healthy environment and more leisurely pace may even prolong your life.
Teach your kids to be financially independent. Unfortunately, unless you are exceedingly wealthy, all your plans for retirement would be futile if you have to continue supporting your children who have already graduated from college. I know this is easier said than done, especially if you have grandchildren who will suffer from their parents’ financial inadequacies. The best way to avoid this situation is to teach your kids early on about the importance of being able to support themselves. Do not let them think they are entitled to anything other than the fruits of their labor. Spoiling a child is one of the worst blunders a parent could commit.
Planning for your retirement while still in your 40s is not too soon. The earlier you face up to the time when you can no longer count on a steady income stream from your work, the better is your situation. While it would be wise to consult with experts on personal finance, you should also be knowledgeable in order to make decisions that are in your best interest.
*Originally published by the Manila Bulletin. D-4, Sunday, July 14, 2013. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.