Retirement Planning: 5 Ways to Build a Retirement Fund in the Philippines

Last Updated on – Nov 23, 2023 @ 9:57 am

Everyone wishes to retire early. Who doesn’t want to? Even workaholics would hate slave-driving themselves to work when they’re old and gray.

Yet not everyone is saving up for retirement.

A recent study confirms the Filipino millennials’ lack of preparation for retirement. Only 7% of the young professionals surveyed have a plan for saving monthly. The study also notes that millennials in the Philippines invest rather inconsistently, doing it only “when they feel like it.”

While it’s easy to put retirement planning on the back burner in your 20s or 30s, what with the many financial obligations to deal with, you can’t just disregard its importance and urgency.

Time goes by faster than you’ll realize. You don’t want to be that senior citizen who regrets not having saved up for retirement sooner.

So waste no time and plan your retirement while you’re still young. It takes a long time to build a retirement fund that assures you’ll live comfortably with financial security.

What is Retirement Planning?

Retirement planning refers to planning and managing your finances to prepare for life after you stop earning income. It involves determining how much money you need when you retire and how you’ll achieve that goal through savings and investments.

Why make a retirement plan at a young age? Because life is uncertain.

You’ll never know how long you’ll live and whether or not you have enough funds to sustain your lifestyle when you retire. Planning for retirement minimizes that risk.

To plan your retirement properly, you have to consider not just the financial but all aspects of life in your golden years:

• Your desired retirement age
• How much money you need for your retirement years
• Where your retirement income will come from
• Where you’ll retire
• The lifestyle you want to maintain in your retirement years
• How you’ll build your retirement fund
• Long-term healthcare plans
• How you’ll manage and protect your assets before and after death

Benefits of Retirement Planning

If you can’t immediately feel the benefits of retirement planning at an early age, why should you still do it? We’ve gathered some of the reasons below.

You can have a backup for emergencies

Emergencies are bound to happen, whether it’s a medical expense or a sudden car breakdown. It’s important to have something in your pocket to help you get out of it. 

When you are able to adequately prepare your income for the future, you wouldn’t need to be worried about emergency situations that might arise.

You can make sure that you have something to fall back on if anything happens.

It’s helpful for people who are not expecting to receive pension

It’s normal for people who are working in the private sector to not have any pension provision. By putting your finances in order, you can plan your retirement so that you can enjoy your life later on. 

Seniors who don’t plan their retirement might have no option but to work unless they have a sound emergency fund in place that can cover any expenses at a moment’s notice.

This is why investing in your retirement can help you earn more money when you stop working. 

It will give you peace of mind

The fact that you don’t have to worry about your future is one of the most satisfying feelings in the world.

When you reach retirement age, you will be able to enjoy your golden years without the stress of having no money to survive.

Regardless of the situation, retirement planning gives you peace of mind that everything you have worked for will be there when you’re old.

It can help you make pre-retirement decisions

Retirement planning requires you to have a clear plan of your finances no matter how certain things may turn out.

A retirement plan will help you evaluate your options beforehand so that you know what you can do in that situation.

Whether you want to travel around the world, join a country club, learn a new hobby, move to another province, or spend more time with your family, you need to prepare enough to make sure that you can do it without having to worry about money. 

Related: 17 Easiest Countries to Get Citizenship

You can enjoy a lower premium

People who start planning their retirement when they’re young and in good shape are able to get a lower premium compared to those who wait until they’re older.

That is a big bonus that you can take advantage of.

Taking care of your retirement in the later stage of your life can get very expensive, and you will also face a higher chance of coverage denial.

Your family will know what to expect

A lot of families don’t have any idea how to give financial support to their elders because they don’t know if their parents are financially prepared.

Retirement planning lets you show your family how you will be able to survive in your golden years without their help. Therefore, you can make it easier for them to know what to expect.

This is also important for you and your partner. When you save up early for retirement, you can both be on the same page with your lifestyle and spending plans when you’re older.

For example, you may have an objective to assist your adult children financially, but your partner doesn’t. Having a retirement plan will help you discuss these things from a better perspective.

You can prepare for healthcare expenses

Healthcare has become more expensive over the years, and you need to be able to prepare enough to cover those costs.

When you are able to predict and prepare for these expenses, you will be able to get ready for them without much difficulty. 

Other helpful guides:

• Best Health Insurance Plans in the Philippines
• Best HMO & Prepaid Health Cards in the Philippines

You can retire on your own terms

Your whole life, you have been working for the day when you can finally stop working. Now that you are ready to retire, you can finally decide when you can do it.

Many people who have not planned for their retirement are forced to work because they are not financially prepared to stop working.

But when you plan for retirement, you can quit your job when you’re ready. From here, you can pursue your hobbies, unpaid work, or charitable efforts.

It can protect your assets

It’s normal for many seniors to sell their properties because they don’t have money for retirement.

In a perfect world, you would want to have all your properties until you die. But in reality, it might not be possible because of your financial needs.

When you can protect your assets through retirement planning, you will be able to access your cash as a last resort instead of having to sell properties. Doing so will help you avoid unnecessary losses and risks.

You can leave a legacy

When you can pass on what you have to leave behind, you will be able to provide financial support to the next generation.

By planning for your future, you can make sure that your children won’t have any financial troubles after your death since they will be able to inherit your wealth without any hassle.

How much money should you save each month for retirement?

Financial experts recommend saving 10% to 15% of your income for retirement, starting in your early 20s.

That’s the ideal scenario. However, not everyone begins building their retirement fund at age 20.

If you start in your 40s or 50s, saving only 10% of your income will never be enough because you have little time left to save until your retirement years.

The percentage of retirement savings must be higher when you start later in life.

To meet your retirement goal, you’ll have to save 24% of your income when you start at age 40 or almost 50% if you start at age 50.

For an easier computation, use MSN Money’s online retirement savings calculator.

Let’s say you’re 25 years old and earning Php 25,000 monthly. You’re expecting to retire by 60 and live until 70 (the average life expectancy in the Philippines based on the latest World Health Organization data).

Experts peg the annual income after retirement to be at 70% to 80% of one’s current annual income.

With a yearly income of Php 240,000 and an investment return of 5%, you’ll need to set aside at least Php 20,518 per year (around Php 1,700 monthly).

3 Stages of Retirement Planning

Retirement planning is a long-term process. It’s more like a marathon than a sprint.

Take things a step at a time, preferably as early as possible, to ensure that your savings will outlive your post-retirement living expenses—and not the other way around.

How you plan your retirement will vary at each stage of your life. Your income, expenses, and financial status will be different in your 50s than when you’re younger.

For a successful retirement planning, it should adapt to the various phases of your life.

First stage: Aggressive wealth accumulation and growth (Age 21 to 35)

This is the phase when retirement planning is at its easiest. In your early 20s to mid-30s, you’re starting your career with just a little money to save and invest.

There’s not much pressure yet because you’re just starting to save money for retirement.

However, your biggest advantage as a young adult is the time you have to grow your money before you retire.

That’s the power of compound interest—what you invest today will grow exponentially over time. The earlier you invest (even if it’s only a small amount), the higher retirement you’ll accumulate.

So focus on saving and investing as much as you can. The first stage of retirement planning is the best time to invest aggressively in long-term, medium-risk to high-risk instruments like mutual funds, real estate, and stocks.

Second stage: Continued asset growth (Age 36 to 50)

Even if they’re earning more than when they were younger, people in their early midlife face tough financial challenges, from raising a family to paying off mortgage.

Despite financial setbacks in your late 30s to early 50s, it’s still important to keep setting aside money for retirement. Yes, even if sending your children to school or paying down debts is your priority right now.

At this stage of retirement planning, you still have time to grow your savings. You also have more information to evaluate your finances and whether or not you’re on track with your retirement savings.

Don’t forget to get life insurance and build an emergency fund so that whatever happens, you and your family can survive without spending your retirement fund.

Third stage: Pre-retirement (Age 51 to 60)

With less than 10 years away from retiring, you have a clearer idea of how much you’ve saved and how much you’ll actually need to cover your post-retirement living expenses.

By this time, you likely have major expenses like your children’s college tuition, home mortgage, and other debts paid off, leaving you with more disposable income to save.

The last stage of planning for retirement must focus on ensuring that your finances are in order. Your money should be placed in more conservative, low-risk investments for capital preservation such as savings accounts, time deposits, and money market accounts.

Consider setting aside funds for your long-term healthcare needs, such as hiring a caregiver and buying your maintenance medicines.

5 Ways to Build a Retirement Fund

What’s the best way to save money for retirement? Certainly, it isn’t letting your money sit in the bank.

Traditional savings accounts in the Philippines earn measly interest rates of less than 1%. Neither is relying just on pension from the SSS or GSIS and retirement benefits from your employer.

Instead, go for long-term investments that yield higher returns and beat the impact of inflation on your retirement savings.

Consider including these five types of investments in your retirement portfolio.

1. VUL Insurance

Minimum initial investment: Php 2,000 per month

Estimated fund value after 25 years: At least Php 2.5 million (with Php 2,000 monthly premium and an average 10% annual return)

Variable universal life insurance (VUL), sometimes called variable unit-linked insurance, is a type of life insurance plan with an investment component.

This two-in-one financial product invests money in various instruments such as bonds and stocks for retirement (and other long-term financial goals) while providing living, disability, and death benefits when the policyholder dies or becomes permanently disabled.

So whether you live too long or die too soon, you and your family are financially protected if you have a VUL insurance policy.

How to get VUL insurance:

Contact a reputable life insurance provider that offers VUL insurance products or approach one of its agents that can guide you through applying for a VUL plan.

Learn More: How to Get a Life Insurance: Top 10 Life Insurance Companies in the Philippines

2. Personal Equity and Retirement Account (PERA)

Minimum initial investment: Php 1,000

Estimated fund value after 25 years (with average 10% annual return):

• Minimum contribution of Php 1,000 per month: Php 1.24 million
• Maximum contribution of Php 100,000 per year: Php 10.91 million

PERA is a voluntary savings and investment account meant to help Filipinos build their retirement fund. It aims to supplement pensions that retirees receive from the SSS or GSIS.

Funds are invested in diversified instruments that include stocks, government securities, mutual funds, and unit investment trust funds (UITFs).

Everyone—whether employed, self-employed, or OFW—who’s earning an income and has a tax identification number (TIN) can invest in PERA. You can set aside up to Php 100,000 every year. If you’re an OFW, you’re allowed to double your savings to Php 200,000 yearly.

PERA is a good way to save for retirement, as it allows tax-free withdrawal when you reach the age of 55. It provides a generous tax exemption on investment income, which helps increase one’s retirement fund.

How to start investing in PERA:

Open an account with an administrator (either BDO or BPI) by visiting its branch.

Submit the PERA requirements such as valid IDs, income tax return, a deposit account with the bank, and your payment for the initial investment.

You’ll be asked to fill out forms to provide your information. After that, your PERA account will be activated.

Learn More: PERA: How to Invest in Personal Equity & Retirement Account

3. Mutual Funds / UITFs

Minimum initial investment: Php 5,000

Estimated fund value after 25 years: Php 1.29 million (with Php 1,000 monthly investment and an average 10% annual return)

Investing in mutual funds and UITFs is an effective method for building a retirement fund.

These instruments have higher long-term growth potential than a bank account and lower risk than the stock market.

It involves pooling your funds with those of other investors and investing them in a diverse portfolio of bonds, stocks, money markets, government securities, and other assets.

Mutual fund or UITF investing is also beginner-friendly. A professional fund manager from the mutual fund company or bank handles your portfolio and makes investment decisions on your behalf.

How to start investing in mutual funds:

Visit a mutual fund company’s or broker’s website to open an account. Fill out its online registration form and answer a risk profile assessment questionnaire.

Then submit the required forms and documents to the company’s office or via courier. Once your mutual account fund has been set up, you can start putting funds into it.

How to start investing in UITFs:

Go to the nearest branch of your preferred bank (better if you have an existing deposit account with the bank) and tell the staff that you want to open a UITF account.

You’ll be asked to complete some forms and present requirements such as valid IDs. Fund your UITF account after the bank issues a certificate of participation.

Learn More: How to Invest in Mutual Funds & UITF in the Philippines

4. Blue-Chip Stocks

Minimum initial investment: Php 5,000

Estimated fund value after 25 years: Php 31.3 million (assuming you invest Php 5,000 monthly in a blue chip stock with an average annual return of 20%)

The stock market offers great potential for high returns to both short-term traders and long-term investors. But stock investing can be risky, and profitability is rather unpredictable.

Of course, you want to ensure that you’ll earn substantially from your investment when you retire.

Your best bet is investing in blue chip stocks of well-established companies in the Philippines with impressive historical performance and proven track record of stability and profitability regardless of market conditions.

Also, many blue chip companies pay dividends to their shareholders, which helps increase your retirement savings.

There are 30 blue chip stocks in the Philippine Stock Exchange. But if you have to prioritize a handful of them, consider buying these top five blue chip stocks with an average annual return of 14% to 20% in the last few years:

• SM Prime Holdings, Inc. (SMPH)
• Jollibee Foods Corporation (JFC)
• Megaworld Corporation (MEG)
• BDO Unibank, Inc. (BDO)
• Ayala Land, Inc. (ALI)

How to start investing in blue chip stocks:

Go to the website of your chosen stock brokerage company to open an online trading account.

If you’re a client of BDO, BPI, or Metrobank, you may opt to sign up for an account with their respective online trading platforms (BDO Securities, BPI Trade, or First Metro Sec).

Opening a stock trading account involves submitting accomplished forms and requirements to the stockbroker. Once your account has been set up, you can fund it with your initial investment to start buying stocks.

Learn More: The Definitive Guide to Stock Trading & Investing in the Philippines

5. Real estate

Minimum initial investment: Php 10,000 (buying a foreclosed land)

Estimated fund value after 25 years: Depends on the location, type of property, type of real estate investment, and other factors

The real estate market in the Philippines has been booming over the past 20 years. Prices of residential properties, in particular, continue to rise and are expected to sustain growth in the coming years.

What does this mean to a budding real estate investor? You can gain profits from buying a home and selling it years later at a higher price.

The earnings can significantly increase your retirement savings in the long run.

In fact, an investor made over Php 1 million in profits from selling a condo unit in Makati she bought two years ago. Imagine how much more you can earn if you hold a property for a longer time before selling it.

Another way to boost your retirement income in your senior years is to get regular cash flow from renting out a house, apartment, or condo unit, whether on a long-term or short-term lease.

It’s a great way to consistently earn passive income before and during your retirement years.

How to start investing in real estate:

Decide on the type of real estate investment you’d want to get into and learn about it as much as you can.

Buying a house for investment entails a lot of research, so take your time finding the ideal location and property that will maximize your profits.

Consider starting small by renting out your idle property on Airbnb, just so you can learn the ropes of real estate investing.

Learn More: How to Invest in Real Estate in the Philippines

15 Useful Tips on How to Build Your Retirement Fund

1. Set your retirement goals and commit to them

Retirement planning involves making serious life-changing decisions. To do it right, begin with setting goals that are specific, measurable, attainable, relevant, and time-bound (SMART).

Incorporate these important things into your retirement goal-setting:

• Retirement age – Decide first on when you want to retire. Your choice will greatly affect your other retirement goals and how you’ll reach them. Article 287 of the Philippine Labor Code sets the compulsory retirement age at 65, though you can choose to stop earning a living earlier or later.
• Retirement costs – How much money do you need to retire? Predicting how much savings is enough to sustain your lifestyle until you die is rather tricky. While you can’t do it accurately, you can at least come up with a ballpark figure, so you’ll know how much you should save to afford your retirement comfortably. As a rule of thumb, estimate your annual retirement income by computing 70% to 80% of your current annual income and then multiply it by the number of years you hope to live after retirement.
• Financial goals – These goals include saving money not just for retirement but also other milestones such as a home or car purchase and your children’s college education. Determine also your goals in terms of increasing your income and paying off your debts. Each financial goal that leads to your retirement must have a target amount and timeframe.
• Risk tolerance – How much risk is acceptable to you when investing money for retirement? It changes as you age. In your 20s, you can be aggressive in your investments, as you have a longer time to prepare financially for retirement. But as you reach your 50s, it’s practical to go for conservative, low-risk investments that help you preserve your capital until you retire.

Once you’ve laid down your retirement goals, create a concrete action plan to meet them. Be fully committed to your goals!

2. Start saving today

Yes, the best time to begin saving for retirement is now—not tomorrow, not next year, and definitely not in 10 years.

The more time you have for saving money until retirement, the longer time your funds have to compound and grow.

Modify your monthly budget such that you have an amount set aside just for your retirement fund, no matter how small it is.

What matters is that you take action, save consistently, and resist the urge to spend your retirement savings.

Read Next: How to Save More Money

3. Automate your savings

For achieving any financial goal, saving money becomes a lot easier when it’s automated. This is especially helpful if you’re forgetful and busy, or if you tend to overspend.

Make your savings automatic by opening a bank savings account (just for your retirement fund) that deducts a fixed amount from your payroll account every month.

4. Create more sources of income

Earning a low salary should never be an excuse for not being able to save for retirement.

If your budget doesn’t really allow room for that, find ways to increase your income.

These could include working overtime (but don’t work yourself to death!), taking sidelines and part-time home-based jobs, and setting up a small business.

Also Read:

• 20 High Paying Remote & Home-based Online Jobs for Filipinos
• 100+ Profitable Small Business Ideas & Opportunities in the Philippines
• Best Sidelines: 5 Profitable Side Hustles for Filipinos in 2019
• How to Manage your Finances like the Top 1%

5. Save more when you earn more

Got a raise or bonus? Consider increasing your savings instead of splurging it.

Set aside at least 50% of the extra money for your retirement fund. Your present self may not be indulged as much as you’d want to, but at least your older self will be thankful for it.

6. Save up for emergencies

Don’t forget to build your emergency fund as well! It really helps to have at least six months’ worth of your living expenses in a savings account or time deposit.

This way, you won’t be tempted to withdraw from your retirement fund when an emergency comes up.

Important: Aside from saving up, it’s also imperative to learn how to manage your emergency fund.

7. Protect your finances through insurance

Protect your assets against disasters, accidents, and other unforeseen events through insurance.

It may seem an added expense, but insurance can help prevent your retirement fund from getting wiped out when something bad happens to your assets or yourself.

Prioritize getting life insurance, health insurance, and disability insurance or income protection insurance for your peace of mind.

If you own a home or car, having home insurance and car insurance policies will greatly help, too.

8. Diversify your investments

It’s important to avoid huge losses when investing money for your retirement fund. Diversification is one of the effective ways to manage the risks that come with investing.

Are you familiar with the financial advice “Don’t put all your eggs in one basket”? That’s what diversifying your investments is all about.

It’s too risky to put all your savings in high-risk investments, while investing only in low-risk instruments will lead to minimal profits.

To diversify your investments, your portfolio should be a mix of low-risk, medium-risk, and high-risk assets. Allocate a percentage of your investible funds to each of these kinds of assets.

An investment risk pyramid can help you visualize how to distribute your funds based on how risky an investment type is.

Three types of assets make up the investment risk pyramid:

1. Base – This section consists of low-risk investments such as government bonds, money market funds, and time deposits with low-yield but stable returns. These assets should form the bulk of your investment portfolio, ideally at 60%.
2. Middle – The middle part of the pyramid represents medium-risk investments such as mutual funds and UITFs that are slightly risky but can grow your funds in the long run. Financial experts recommend investing 34% of your funds in medium-risk assets.
3. Summit – The peak of the investment risk pyramid is made up of high-risk investments such as stocks and real estate with high-return potential. Being the smallest section of the pyramid, the summit is where you put no more than 6% of your investible funds—essentially the amount that you’re ready to lose.

Related: 12 Best Investments under P100,000 in the Philippines

9. Be aggressive with your investments if you’re starting early

Time is your ally when it comes to investing. Twenty-somethings have a longer time to grow their funds compared to people in their 40s and 50s.

If you’re starting to build your retirement fund at a young age, maximize it by investing a higher percentage of your funds in high-risk investment vehicles.

The long time horizon allows your investment to grow over time despite the ups and downs of the stock market.

10. Avoid high-risk investments if you’re starting late

On the other hand, starting your retirement fund a few years before you retire means you barely have time to grow your funds and recover from a possible loss.

At this point, investing in high-risk instruments is a gamble.

What you can do is to put your money in investment vehicles intended for capital preservation. Of course, given the time constraint, the only way to increase your retirement income is to save more money.

Related: Money Mistakes Most Filipinos Make

11. Consult a registered financial planner

Unless you’re a trained professional in finance, you need expert advice and guidance from a registered financial planner (RFP) whose knowledge, experience, and skill can help you make sound investment decisions.

To start off, you may check the list of registered financial planners in the Philippines on the RFP Philippines website.

Related: Financial Planning: How to Manage your Personal Finance

12. Avoid becoming your parents’ retirement plan

In the Philippines, children are expected to help their parents when they retire. Repaying one’s utang na loob is deeply rooted in the Filipino culture.

However—even if you want to support your aging parents—being their retirement plan at the expense of your own shouldn’t be the case.

If you let that happen, you’ll likely to repeat the same thing when you retire. Let’s break that unhealthy cycle.

Communication is the key. Make your parents understand that you can’t provide for all their needs. You have your own family to raise and retirement to prepare for.

Assure them that you’ll still assist them, especially with setting up their retirement fund—but not funding it entirely.

Doing so enables you to save more for your retirement.

13. Don’t make your children your retirement plan

When planning your retirement, relying on financial assistance from your children should never be part of the plan.

This will just lead to financial difficulties if your children are not willing or cannot support you when you retire.

Rather, create a solid saving and investment strategy that will help you build income for funding your retirement.

Your financial security in your golden years will do your children a favor because they’ll never have to worry about your finances.

14. Never skimp on retirement savings

Building your retirement fund is a continuous process. Funding your children’s college education should not stop you from preparing financially for your retirement.

If you’re having a hard time managing your finances, then make the necessary adjustments, like not sending children to expensive schools.

Remember: Your children have more time and opportunities than you do. They can get scholarships and part-time jobs.

Your income-earning potential when you’re old is limited. You don’t want to become a burden to your children during your retirement years, do you?

15. Review your retirement plan regularly

Your retirement plan isn’t set in stone. Review it regularly, identifying what’s working and what isn’t.

Changes in your life call for adjustments to your plan. Modify or improve it as necessary.