13 of the Worst Retirement Planning Mistakes to Avoid
Retiring at the age of 60 years old on average, there are at least five retirement fund methods common among the Filipinos. These are pension plans, Personal Equity Retirement Account (PERA), insurance plans, financial plans, and real estate. So, if you’ve already invested in a house and lot in Quezon City - whether you live there or turned it into a passive investment as a rental, you are definitely one step ahead. But, of course, you can still explore your retirement options. But no matter which option you choose, don’t make these retirement planning mistakes.
Retirement planning mistakes to avoid
1) Not having a retirement plan in place
This is perhaps the biggest mistake because not having a plan compromises your future quality of life. You should have an idea of how much you’re going to need to live comfortably during your retirement. It would help if you looked into these things when retirement planning:
Current age and the time you still have until retirement
Goal retirement age
2) Not saving enough money for retirement
Indeed, the statement that says start them young could not be any truer when it comes to retirement. The amount of money we need will vary, although the rule of thumb is saving 10 to 15% of your monthly income. Adjust the savings plan to save more if you want to live more comfortably in the future. One constant thing about retirement is that the earlier you save for retirement, the more secure your future will be. The principle of compound interest takes precedence over the actual amount saved. It simply means putting away your retirement fund and letting your savings accumulate every year.
3) Not increasing the amount after a pay increase
When saving for retirement, it pays to have a separate retirement account to put the money and not withdraw from it. Retirement savings is the money you set aside every paycheck. Again, this could be a certain percentage or amount. For the latter, if you had a salary increase, it would be a mistake not to increase the retirement savings amount. For instance, you may dedicate whatever salary increase to your retirement savings account unless you have a solid reason to spend the said increase. While at it, if you want to spend the money on investment purposes, you can. It means you are making whatever money you already earned to work for you.
4) Not checking the performance of the retirement account
Now that you have a dedicated retirement savings account, it would be best to check its performance regularly. But if you do not have the said account, it is time to look for options focusing on high-yield savings accounts. Interest rates can be between 2.5 and 4.5%. If you open a savings account with 4.5% annual interest, it means growing your retirement savings by the said rate. Of course, the more money you have on the account and the longer you have it, the higher the interest.
5) Not investing the money you already have
Some Filipinos are not open to investing their money, especially from their retirement fund. Nonetheless, financial advisors can walk you through the many ways to invest, from real estate to mutual funds, and assess your risk tolerance before you can make any investment decision. The majority of the retirees or planning to retire early are generally conservative investors. You may learn each of them independently, too, though there is a steep learning curve involved. If you are not financially or investment savvy, you might as well let the expert guide you. This ensures the protection of your retirement fund that you earned and worked so hard for when you were younger.
6) Not picking the suitable investments
This part can be easily overlooked, but the right investments definitely matter. Again, this will depend on your risk tolerance and your diligence in learning which investments to focus on. You might want to focus on real estate investments, but you also must learn the available investment routes. For example, you may buy a pre-selling condo or an RFO house that you may resell at a higher price. Reselling condo units acquired in the pre-selling stage can have the highest yield. Nonetheless, since property value appreciates, you can surely earn when selling a property. You can turn a property into passive income if selling is not your forte through rentals. Your choices are short-term, long-term, and vacation rentals.
7) Not rebalancing the investment portfolio
Any diligent investor would know the importance of enriching the investment portfolio and rebalancing the said portfolio at least annually. Experts even claim that rebalancing should be done every quarter. Stay away from the set-it-and-forget-it attitude - this is not going to work. Likewise, when you take charge of your investments, you would know which among the assets are not performing well and decide to pull out these investments to concentrate on investments that meet or exceed the expected returns. Scaling back is critical when it is your retirement fund on the line. Another consideration is that the market constantly changes, so should your retirement portfolio and approach. For instance, aside from the standard stocks and mutual funds, you may diversify your portfolio with REITs or real estate investment trusts. REIT is an organized investment strategy wherein individuals are allowed to invest in income-producing real estate assets. REITs offer not just substantial dividends but also long-term capital appreciation.
8) Not planning for healthcare needs and costs
We are already facing staggering healthcare costs, which could skyrocket still in the future. Today, a night’s stay in the hospital costs Php2,500 and more in the intensive care unit (ICU). The amount does not include laboratory fees, medicine, doctor’s fee, and additional incidental expenses. If you don’t consider these things, you may run out of funds if you get sick after retiring in the first couple of years. You want a comprehensive retirement plan that covers this–a plan that should include high-value assets such as real estate properties and investment assets that you can quickly turn into liquid assets. Through this, you will have enough funds to cover immediate medical costs and long-term care costs if the need arises.
9) Not planning for inflation and taxes
It is crucial to consider inflation because what your Php500 can buy now may not buy you the same goods and services in 10 years. Generally, the amount of peso, dollar, or any currency decreases in value over time. The average inflation rate is 2%, wherein the actual value of Php500 could be around Php360. Thus, it is best to consider the estimated inflation rate when you reach your retirement age. Also, the tax implications should figure into your calculations. Retirement income taxation in the Philippines is straightforward. It will be tax-exempt if you receive the amount through your employer’s registered retirement plan. However, any amount received in excess of this plan shall be taxable.
10) Not paying debts diligently
Debts can antagonize whatever savings and future financial plans you may have. Financial obligations usually involve hefty interest rates that decrease the value of the money you own (since this is money owed). The worst mistake to make is to drive up debts ahead of your retirement, exhausting your savings in the process. So stay away from any last-minute debts. If you can pay for your debts while also putting money into your retirement account, then do so.
11) Not fighting the urge to withdraw from the retirement fund
While it is true that the unexpected can happen, your retirement fund should be the last fund to withdraw from. Any amount you spend out of your retirement fund means lower savings in the future. So resist the temptation to withdraw money from the said fund. Better yet, build an emergency fund that you can take money from if you have to.
12) Not planning for future situations
When planning retirement, you need to prepare for uncertainties. For instance, you may end up retiring earlier than you are planning to because of losing a job. Finding a replacement job would be difficult because of old age. The same happens when you contract an illness or have a disability that renders you unable to work. Being financially prepared means saving more than enough if you suddenly had to stop working at an earlier age.
13) Not having a long-term mindset
You might want to ask yourself: when is the right time to think about retirement? Some financial experts say that retirement planning should begin when you receive your first paycheck. Don’t be like other people who failed to cultivate a long-term mindset, thinking that 20, 30, or 40 years are a lifetime away. Don’t be like the others who believe they would not retire any time sooner, nor would they retire at all. Regardless of where you are in the retirement continuum, you are bound to make mistakes, but the worst mistake you could ever make is not planning for and thinking about your future.