By Maya Baltazar Herrera

Today, we continue to talk about saving for retirement. In this column, we assume that you know your target fund amount?your magic number. The next question is how you save enough to get there.

Components

For the regular person, the retirement fund amount will come from at least two sources. First, the amount they already have in savings. Next the amount coming from money they will save in the future. Other sources would include the company retirement benefit and social security pension.

First, my general advice is to treat the social security pension as gravy. Don?t count it; don?t count on it. Let it be an extra source of money.

As to the company retirement benefit, you will need to find out what benefit amount will become available to you. For many retirement plans, the benefit is one month?s salary per year of service. Some companies will use a multiplier different from one, e.g. 150 percent or 85 percent. Forecasting that amount involves estimating service years at retirement and salary at retirement. Estimating service years is easy. Forecasting salary is much like forecasting for inflation or forecasting with compound interest. Here?s a table of future value factors that can be used:

Forecasting for Juan

Now, let?s say Juan?s current monthly salary is P10,000 and he is 20 years away from retirement. Assuming Juan?s salary increases 6 percent a year, his salary at retirement will be 3.20714 times P10,000, which is P32,071.

If Juan expects to receive one month?s salary per year of service and his service at retirement will be 25 years, then his retirement benefit will be 25 times 32,071 or P801,785. Juan just needs to make sure that he deducts any income taxes that would be applicable. In the Philippines, retirement benefits are generally tax-free if the employee is at least age 50 with at least 10 years of service. There are other conditions and you should verify the applicability of this exemption.

This same table can also be used to forecast what happens to existing savings. Let?s say Juan currently has about 300,000 worth of savings. Assuming that Juan can earn a net rate of 8 percent per annum on his money, his money will grow to P1,398,288 (300,000 times 4.66096).

This means that, without adding additional savings, Juan expects to have a total of P2,200,073.

The magic of compound interest

First, something surprising that you should know.

Let?s take three friends: Pepe, Pilar and Maria. Pilar starts saving at age 30. She saves 10,000 a year for 7 years and invests all her money in a fund that earns 6 percent a year and keeps her money invested until she reaches age 50. Pepe does not save for seven years, but then decides to save 10,000 a year for the remaining 13 years until he reaches age 50. Maria, on the other hand, saves 10,000 a year at age 30 all the way until age 50. Both Pepe and Maria earn the same 6 percent a year that Pilar does.

Here?s what they have at age 50:

First, notice that the amount of investment earnings Pepe has is even less than Pilar?s?in spite of the fact that Pilar has set aside only P70,000. This is the magic of compound interest. Pilar?s money has stayed invested longer than Pepe and that makes a serious difference. Pilar?s money has stayed invested seven years more. In fact, Pilar and Pepe have almost the same amount of money. Pilar trails Pepe by less than P11,000?in spite of the fact that Pepe has set aside P60,000 more in savings! Maria, who wisely invested regularly, has almost double the amount of money of her two friends.

So here are the lessons we should take. Make saving money a habit. Ideally, save something each month, and more when you get a bonus. Begin to save as early as you can. Keep your money invested.

Saving

Finally, let?s talk about the final component of our fund. The amount you will save in the future.

Here are the tables that will be useful.

This first table shows how much P1,000 saved each year will grow to depending on the number of years and the investment rate of return earned.

This next table assumes you save P1,000 in the first year and that your savings amount increases 5 percent each year. This is what would happen if you save a fixed amount of your salary and your salary increases 5 percent each year.

If Juan saves P10,000 each year for the next 20 years and earns 8 percent a year, he will add another P494,230 to his retirement fund.

Now you have most of what you need to create your very own quick financial plan. If you need more help, you can download the worksheet that I will post in my site in February.

Kung hei fat choi!

Readers can e-mail Maya at integrations_manila@yahoo.com. Or visit her site at http://www.mayaherrera.com.