Revisit your retirement plan Dr. Johnny Noet Ravalo INQUIRER.net
February 25, 2009
My father just got out of the Intensive Care Unit. Throughout his confinement, he was constantly asking about the balance on his bills. We tried to dance around the issue. Finally, he stopped asking after assuring himself that he had his Social Security System pension to rely on.
His comment made me wonder. My father’s pension is only slightly more than P4,000 a month after working all his life. This amount covers less than a week of his maintenance medication. We are not even talking here of having a caregiver or of the costs of being confined at a hospital. If new medicines are prescribed after his confinement, there is a very good chance that his medicine needs will only increase.
The financial demands of long-term health care is just one of the reasons why you should begin to ask how this on-going global crisis affects your projected retirement plans.
Financial markets have seen a general decline in interest rates. How does this lower-interest rate environment impact investors, specifically retirement plans?
Retirement plans are particularly vulnerable to low interest rates. Lower yields will translate to lower expected returns over time. It is simply unrealistic to expect the same returns now as the returns you enjoyed 12 to 18 months ago. What the crisis has done, among others, is alter financial projections.
The difficulty then is two-fold. First, there may be a real need to scale down our longer-term financial plans. If your target was to earn 6 percent over 25 years, your initial P100 will eventually become P429.18. If you get 6 percent for 20 years but only get 1 percent for five years, the nest egg shrinks to P337.07. That is a 22 percent drop in the retirement fund as a result of five bad investing years despite 20 good years.
Second, there may be the temptation to compensate by going for more complex, higher risk instruments. That would not be prudent and is probably one of the reasons why the international market is where it is today.
Of course there are other factors involved. A P4,000-a-month pension is not enough to meet my father’s needs in the first place and having to adjust further does not leave much room. The option though is to live as if the original retirement plan will be sufficient and without the reality check now, get the shock of your life when you find that it won’t be enough.
(Have a question for Dr. Noet? Email personal_finance@inquirer.net.)
(Dr. Noet Ravalo is a macro-financial economist by practice and profession. He is currently Managing Director at the Bangko Sentral ng Pilipinas, the Philippine central bank. Previous to this, he was chief economist of the Bankers Association of the Philippines until 2002, after which he did consulting work. Comments and views in this article are those of Dr. Ravalo in his personal capacity and do not necessarily reflect the views of the BSP.)
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