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How to Compute and Achieve your Retirement Goal?


The best time to prepare for retirement is the day we receive our first paycheck. Unless we plan to work for the rest of our lives, then there is no need to plan for retirement. The challenge today is that most companies conduct retirement planning programs to their employees when their employees are nearing retirement. Sad to say, there is not enough time to plan anymore. Retirement planning should be done as soon as possible. However, the reason most people don’t plan is because a lot don’t know how. Here is a simple formula to compute and set a retirement goal.

Retirement means having financial and time freedom
Retirement means having financial and time freedom
The 10/20 formula can be used to determine one’s financial needs including protection or insurance and retirement needs. However, this is just a suggestive “rule of thumb” to have a simple solution. Total financial needs analysis is truly needed to determine one’s protection and retirement needs. But again, complication has always been people’s challenge in financial planning as a lot don’t have the discipline to learn the details. Thus, a simple solution should be employ to have quick execution.

Many financial professionals suggest that for your protection or life insurance needs, the formula to use is:
Annual Income x 10 = protection need

While for retirement planning, accounting inflation, the formula to use for retirement needs is:

Annual Income x 20 = retirement goal

Thus: the 10/20 formula.

Today, let’s emphasize on our retirement goal. Assuming, a person earning 20,000 pesos per month, then using the 10/20 formula:

20,000 x 12 = 240,000 annual income
240,000 x 20 = 4.8 M ~ 5M retirement goal.

Now knowing your retirement goal, there are two ways to achieve it: (1) save for it and (2) invest money for it.

1. Save Money

By simply saving money, you can hit your 5M retirement goal. To simplify calculation, assuming your income is constant: 20,000 pesos per month. To achieve your goal:

5M / 20,000 = 250 months
250 months / 12 months = 20.833 years!

If you are currently 25 years old:

25 + ~20 years = 45 years old
at this age: you can now retire

BUT: without eating, drinking buying stuffs for the next 20 years as all your income goes to your savings.

Therefore, saving is not enough. We need not just work hard, but also work smart. That’s why we need to learn how to invest.

2. Invest Money

However, if you invest money, for simplification purposes: assuming we invest 20% of our income (20% of 20,000 = 4,000 per month), at an investment vehicle that earns 12% per year like mutual funds:

Investment of 4,000 per month at 12% per year
Investment of 4,000 per month at 12% per year
After 22 - 23 years, your investment will accumulate to + 5M pesos! Having the same age, at around 45 years old, one can then retire. 

It is also important to note that the above calculation does not include inflation, taxes, salary increase and other factors that may affect our financial needs, thus the above calculation may not be enough.

Financial education is the key!

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