Retirement Fund 101: Plan, Save and Invest for Early Retirement

Published: September 25, 2020 | Updated: October 19, 2020 | Posted by: Moneymax | Personal Finance


Retirement Fund in the Philippines | Moneymax

Only 20% of Filipino senior citizens are covered by either an SSS or GSIS pension, which means more than seven million retirees have no funds to cover their retirement needs[1]. While it’s easy to ignore retirement when you’re a young adult, it’s still an investable scenario that everyone should be prepared for. This is where a retirement fund and retirement planning come in.

What is Retirement Planning?

Retirement planning means preparing and managing your finances for life after you stop making an income. The process involves the following:

  • Identifying your desired retirement age
  • Estimating the amount you need for your years of retirement
  • Determining the source of your retirement income
  • Identifying your retirement lifestyle

Retirement planning can help you pay for emergencies you may encounter during your golden years or even tick off items in your bucket list.

What is a Retirement Fund?

After planning for your retirement, you need to create a retirement fund. This is any plan, fund, or scheme that will provide you retirement income. A retirement fund will help you pay bills and maintain your desired lifestyle even after you start earning an income.

You can create a retirement fund by saving every month or investing. Government agencies also offer pension plans that can help you during retirement.

When to Start a Retirement Fund?

The long and short answer is NOW. Ideally, you should start your retirement fund in your 20s or when you get your first job. The sooner you start saving, the more time your fund can grow. However, it’s never too late to start your retirement fund later in life, you just have to save more than you would if you started early.

How Much Retirement Fund Do I Need?

retirement fund - how much retirement fund do i need

According to experts, you should save at least 15% of your net income monthly. Most people need about 55% to 80% of their current income to maintain their lifestyle during retirement.

If you’re just starting to save for retirement in your 30s, you may want to save a little more than 15% of your monthly income to reach your goal.

For example, if you earn PHP 40,000 a month, PHP 6,000 will go to your retirement fund. That’s PHP 72,000 annually and about PHP 1.44 million in 20 years. Assuming you started to save at age 25, you will already have this amount once you’re 45 years old.

However, the 15% monthly saving is just part of your retirement fund. If you have a pension plan or an investment venture, that will greatly contribute to your retirement income. Saving 15% of your income each month may be enough for some, while inadequate for others. It all depends on the lifestyle you want to maintain during retirement.

Is Retirement Fund Taxable?

Your retirement fund may compose of income during your retirement age, investment, or benefits. Whether these are taxable or not depends on a few conditions.

If you got a PERA account and invested in stocks, mutual funds, and other assets, your withdrawals are non-taxable after the age of 55[1]. Your contributions are also exempted from withholding income tax.

If you have a Reasonable Private Benefits Plan (RPBP) as a retirement plan from a private employer, it is tax-exempt[1].

Under RA 4917, a retirement benefit is non-taxable if you have been in service for the same employer for at least 10 years and you are 50 years old upon availing the benefit. You can only avail this benefit once.

Under RA 7641, your retirement benefit shall be non-taxable if there is a Collective Bargaining Agreement (CBA) granting you retirement benefits. If there is no CBA, you must be at least 60 years old and have rendered at least five years of service to the same employer.

The Importance of a Retirement Fund

Many look forward to retiring because that’s the perfect time to pursue your hobbies and simply enjoy life. There’s no need to report to work and spend half the day holed up in the office. Retirement is when you have the freest time in your hands; however, with more free time, you run the risk of spending more, and so you need a healthy retirement fund.

Having a retirement fund allows retirees to live their dreams, whether it’s retiring on a beach or enjoying daily lunches with amigas at the nearby mall. With the Php 13,000 monthly pension limit, it can be difficult to live out one’s dream retirement, so it’s important that one starts saving and investing early on using the three alternatives above. And for more tips on saving for a great retirement, check out the 5 Retirement Planning Mistakes You Should Avoid.

Steps to Building a Retirement Fund

retirement fund - how to build a retirement fund

Here are a few steps you can take when building your retirement fund in the Philippines:

1. Build an Emergency Fund

Your retirement fund is not your emergency fund. Create a separate fund for emergencies that can cover unexpected expenses such as medical bills and home repairs. When you have this in place don’t touch it unless extremely necessary.

2. Pay Off Your Debts

You can’t venture in retirement investment if your money is just going towards loan payments. So, get rid of your debts first before investing, making sure that your earnings will go towards your funds instead of your credit card’s outstanding balance.

3. Create a Budget

Include your retirement plan to your monthly budget. Without a plan, it’s easy to overspend on wants instead of your needs. A budget gives you a guideline where your income should go.

4. Set Goals

What is your retirement dream? Do you want to live in the province and be a plantita or plantito? Or do you want to travel the world? Whatever your goals are, having a clear picture of what your retirement looks like will give a starting point for building your fund.

Setting your goals will give you answers to some important questions, such as how much money you’ll need during retirement and how much you need to save to make your retirement dream a reality.

5. Start saving now

Save 15% of your monthly income or invest the money in assets. The investment will help you grow your retirement fund a lot faster, while you tend to other financial obligations. Keep in mind that you need to do your due diligence before dipping your toes in the investment pool.

Types of Retirement Funds in the Philippines

retirement fund - retirement fund types

1. Pension Plans

A pension plan is a retirement plan that requires the employer to pay contributions to a pool of funds set aside for the employee’s future benefit. The pool of funds is typically invested on behalf of the employee. You will then get your earnings back during retirement either as a monthly payment or lump sum, amounting to the total of your contribution.

You can get a pension plan from private providers in the country. However, the most common pension plans available are those offered by the Government Service Insurance System (GSIS), Pag-IBIG Fund, and Social Security System (SSS).

GSIS Pension Plan

This retirement plan is exclusive for government employees. You can either get a five-year lump sum or cash payment with an instant pension. You can also get a refund of your GSIS contribution upon retirement from employers.

PAG-IBIG Pension Plan

Also known as the PAG-IBIG Regular Savings Program, this retirement plan lets you withdraw your PAG-IBIG contribution after 20 years of contribution or during your retirement at age 60 or 65.

SSS Pension Plan

This is a lifetime benefit to SSS members who have made at least 120 months of contribution prior to the semester of retirement. The monthly compensation for an SSS pension plan depends on your contribution, credited years of service, and the number of dependents.

2. PERA Investment

Launched by the Bangko Sentral ng Pilipinas (BSP), the Personal Equity and Retirement Account (PERA) investment aims to help Filipinos, 18 years old and above, to save money for retirement. You can contribute PHP 100,00 annually or up to PHP 200,000 if you are an OFW.

PERA is a voluntary retirement account with the purpose of investing money in PERA products in the Philippines. You get a 5% tax credit with this type of retirement fund. The earnings on investment are tax-free as well.

Your PERA contribution can be invested in the following:

  • Annuity contracts
  • Exchange-traded bonds
  • Insurance products
  • Locally traded stocks and other securities
  • Mutual funds
  • Pre-need pension plan
  • Unit investment trust fund (UITF)

At the moment, only BDO and BPI are the only financial institutions accredited as PERA administrators.

3. Insurance Plans

Insurance plans can help you protect yourself or your assets from any financial losses and act as a retirement fund. There are many insurance products in the market that fit any needs you have. You can also choose between life and non-life insurance.

Life insurance products are policies that pay out a set amount in case of the insured’s death. On the other hand, non-life insurance products are policies that cover people, properties, and other liabilities.

Read more: Starting a Family? Consider These 10 Family Insurance Types

4. Investment Funds

In general, an investment fund is a pool of funds from various investors used to collectively buy securities. Each investor retains and controls the ownership of their share. The amount involved in investment funds is typically larger compared to mutual funds, with the return potential being bigger as well.

5. Real Estate

retirement fund - retirement fund types - real estate

Investing in real estate is a great way to earn passive income for your retirement fund. However, the amount you need to invest can be in the hundreds of thousands, even millions depending on the property. You may also have to study the property market in the country before building your real estate portfolio.

Read more: 8 Great Ideas to Make Your Property Profitable

6. Mutual Funds

Mutual funds are professionally managed investment products (bonds, stocks, money market) composed of a pool of money from different investors. The money is invested in various assets. With this type of retirement fund, you will get equal shares in the profit or losses of the investment. A fund manager handles the fund for investors. In the Philippines, insurance companies typically offer mutual funds.

7. Unit Investment Trust Fund (UITF)

Similar to a mutual fund, UITF is a pool of investments with funds from different investors. A professional fund manager also handles the investment of your behalf. UITFs are usually invested in money market funds, equity, or balanced funds. This type of retirement fund is offered by banks and is regulated by the BSP.

8. Exchange-Traded Funds (ETF)

ETFs are a collection of investments that can be bought and sold in an instant. ETF is like mutual funds and UITFs in the sense that they are all a pool of assets funded various investors. However, ETF can be traded within the day like a regular stock.

Read more: ETF? Easy Investing with ETFs in the Philippines

Final Thoughts

Planning for retirement and building a fund will help you live your life to the fullest, even in old age. Start saving now and consider investing your money to grow your retirement fund a lot faster. Make sure to budget your monthly finances and save 15% of your income for the fund. If you have debts, ensure that they are also taken care of.

Read more: Investments for Beginners: A Comprehensive Guide

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