Wednesday, August 29, 2012

On Retirement Pensions through Mutual Fund Investment


My colleagues and I, who are all Filipino auditors working here abroad, had discussion about social security contribution earlier during our lunch break.  We discussed how much should be contributed monthly to our social security in the Philippines, if we are really required to the contribution and about its frequency.

Personally, I paid my social security monthly premium during my first year of working abroad.  However, at the start of January 2012, I stopped paying for my SSS premium when I have read about news that some retirement pension plans are not being paid to the people, and that the monthly pensions received by “pensioners” (sorry for the redundancy) only ranges from Php1,200 to Php2,400 monthly.  Does anyone here know how much the monthly pensions received from SSS?


My thought provoking questions that made me come into this realisation of not paying for my social security are these:

1.  At present, I am not employed in the Philippines, hence the social security is not automatically deducted from my salary (and I’m paying for social security here in the country where I’m working right now!), then why would I pay for two social security contributions?

2.  If I get an SSS loan, I even have to pay interest!  Why would I pay interest for the money I give to the institution in the first place? (I find this weird.)

3.  How much do I earn from my social security? Why do I have to wait until I’m 60 or 65 years old to redeem my money? Are the pensions I will receive be enough for my daily living allowance 40 years from now?

Disclaimer:  Social security contributions are automatically deducted from employees.  Don’t get me wrong.  Social security and pensions are employee benefits – because our employers also pay almost twice of the employee’s monthly contributions.  This post is for people who opt to have voluntary SSS contributions, like OFWs or business owners, and for those who have a “choice” to invest their monthly premium contribution in other investment vehicles that can earn better and without much restriction as to its liquidity (ie: You can withdraw your money at anytime you like).


Comparison of Monthly SSS Premiums to Compound Interest Investments
This is an example scenario. 

I am 26 years old at present.  I pay Php500 monthly for my social security which I can receive in the form of pension when I reach 65 years old, let’s approximate that as 40 years from now.   To calculate for my total premium:


Php 500 monthly premium  x  12 months  x  40 years   =  Php 240,000


With a total contribution of Php240,000 for the next 40 years,  let’s say that I will receive     monthly pension of Php3,000 and I will live until 100 years old.  From age of 65 to 100, that’s 35 years of living together with my monthly retirement pension.  Computation is as follows:


Php3,000 monthly pension  x  12 months  x  35 years   =  Php 1.26 million



Wouldn’t you be glad to receive Php1.26 million from an investment of just Php240,000 at approximately 75 years from now (That’s 40 + 35 years)? It is really a great! But do I really have to wait that long?!?!


How about Equities and Mutual Funds Investment?

Equities and mutual funds investment would require more than Php500 investment contribution.  But let’s say that we save our Php500 monthly premium and invest yearly to a mutual fund company.  (Php500 is equal to Php6000 per year.)

Let’s also set 10% interest earnings per year.*


Due to the power of compound interest from Year 2 onwards, our monthly contribution goes this way:

Open up your Excel spreadsheet and manually compute for your earnings at age 65 (which is 40 years from now from my present age).  It will be a whooping Php3.22 million! Amazing? Just always do the numbers. =)


*
The 10% earning may vary.  It can either go up or down.
Most mutual fund companies have percentage earnings of 10-25% per year. 
I will discuss an actual example of my own mutual fund in my next post (with screenshot from my portfolio). =)
Stay tuned. _(",)/




Keep learning and keep on moving forward!


Cheers,
Lyn-Lyn _(“,)/


1 comment:

  1. This is a good point Lynlyn.

    I wish employees here in the Philippines (like me) would have a choice whether to pay their social securites or not, as there are better ways to build pensions and reap the benefits at an earlier time (20yrs for some). Sadly, that choice is taken away from us. Pilipinas eh!

    personally, I have my insurances and medical benefits to cover for my health expenses.

    And top it off with the scare that some pensions are not being paid to the beneficiaries! grrr!

    ReplyDelete

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