Thinking ‘late’ is better than ‘never’ can get you in trouble

Johnny Noe Ravalo explains this in figures, already doing the math for us. hoping nobody gets him wrong.

To some extent, we can still play a catch-up game in planning for retirement, he says. But there’s a point where it becomes too late.

Read his article here. Below is an excerpt and the graphs he prepared. Click on them for a bigger, clearer version. Enjoy reading!

We all get pre-occupied by the rat race. Surely taking a few years off wouldn’t hurt my retirement plan. Or would it?

Anyone who wants to retire well needs to ask himself (1) how long do I expect to live and (2) how much time do I have before I retire?

The last thing we want is to run out of resources after we retire. We would rather bequeath what we have left rather than ask our children to feed us. That’s why the planning horizon is important. We need time to prepare.

Figure 1 in the gallery shows what happens when we have set aside P100,000 (for the lump-sum, just-in-case expenses) and then we add P50,000 each year to our retirement fund. Let’s assume that it generates a return of 5.0 percent per year.

Getting one’s first full-time job at 21 to 22 years old, a young worker usually needs a few years to get “settled” (complete change of wardrobe, treating the immediate family, spending on “tools” that make us look more professional). This transition is normally done by 25 years old, which leaves 30 years before retirement.

Using the assumed parameters, the potential retirement kitty will come out to P3.92 million. This figure is not etched in stone as many things can and do change. Rather than get caught up in the accuracy of an absolute number, I find it more useful to think in “relative terms”.

Now, what happens if we take a few years off from the 30-year plan? After all, 30 years is a very long period and surely some time off wouldn’t hurt. Or would it?

Five years off from the 30-year planning horizon ─ that’s 16 percent if you’re counting ─ makes us lose more than 25 percent of the full potential value of our retirement kitty. And if we take a third off the planning timeline, we lose almost half of the potential value! (See Figure 1 in the gallery).

There is a world of difference between starting to plan for retirement at 25 years old versus starting at 40. Roughly two out of every three pesos that could have been generated is lost just because we start later than sooner.

Is the gap permanent? Absolutely not. Can we retire then in five or 10 years if we only start to prepare our retirement kitty now? Not exactly.

The same graph shows that catching up is increasingly difficult the more we delay. If we only allow five years of pension contribution, we would have lost 89 percent of what the fund could have been. For a vesting period that short, the problem becomes more absolute than relative: five years is too short to have enough in a retirement fund irrespective of any consideration of foregone opportunities.

Read the rest of the article here.

Below are the other graphs he used for the article.

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