You work hard to save up for retirement. But if your retirement planning revolves entirely around saving money, your money will likely lose power over time due to inflation. If you want to live comfortably when you retire, you need to preserve your money’s purchasing power. You need to start investing for retirement rather than simply saving.
Here’s how you can do that.
How to invest for retirement?
Many Filipinos feel that retirement investment is reserved for the upper-middle to wealthy class. But this couldn’t be farther from the truth. Everyone can – and should – invest for retirement.
With the wide range of investment products available in the market today, everyone is sure to find the ideal investment. The key is finding investment products that align with your current income level and financial goals.
You don’t need a huge amount of capital to invest. You can start small, such as with your next year-end bonus. A more important decision is where to invest your year-end bonus, so it yields the most value toward your retirement fund.
When you decided to invest your money, there are risks involved. The higher the risk, the higher you can potentially gain, and the more you invest, the bigger the returns. But this also means that if your investment backfires, you stand to lose a sizable amount.
While investing poses a risk, considering the time value of money, it can potentially bring returns that are most likely higher than if you just let your money sit in your savings account. It seems daunting but learning how to invest for retirement the right way doesn’t have to be complicated.
The best investments for retirement
First, know how comfortable you feel when taking on risks when investing. For example, would you like to invest in safe, yet low-return investments or would you prefer to take more risks in the hope of getting larger gains? When investing for retirement, you can choose between three types of investments:
Low-risk investments
Low-risk investment options include time deposits and money market funds. Most of these don't offer interests or returns that are higher than the current inflation rate. But they help protect the money you save.
By opening a time deposit account, you commit to setting aside a certain amount of money for a determined period, with the expectation of earning a pre-specified interest on the date of maturity. It doesn't matter whether you choose a term of maturity that is long term or short term--you are guaranteed the principal amount plus interest earnings.
Money market funds have an investment horizon, or the amount of time you are expected to keep the fund, of at least 30 days. Banks use money from money market investments to invest in stable, low-risk, and short-term securities. They are excellent investment vehicles when you aim to boost returns on the portion of your savings' value that you want to protect.
But while time deposits and money market instruments are some of the safest investments for retirement, the size of the return is lower compared to other investments because there is less risk involved. If you want to gain more from your money, you can choose to go with medium-risk investment instead.
Medium-risk investments
Medium-risk investments are medium-term investments with moderate returns. While there's a certain amount of risk involved, you receive higher returns than regular deposit products.
Medium-risk investments include fixed-income securities like corporate bonds. You can diversify by investing in a bond in several markets. These pay well over the medium term, and you can grow your money nicely.
Some of Metrobank's Unit Investment Trust Funds (UITFs), such as the Metro Max-3 Bond Fund and Metro Corporate Bond Fund, are great examples of medium-risk investments. Choose the type of investment that brings you closer to where you want to be. For instance, the Metro Max-3 Bond Fund lets you earn through bonds without buying them yourself. Your funds are invested in fixed income instruments with higher potential returns compared to low-risk investments.
It's the best intermediate-term bond fund for growing your savings over time, since it has an investment horizon of at least one year.
High-risk investments
High-risk investments refer to stocks, hedge funds, and equity funds. They come with a high potential risk of loss, but the returns are rewarding when held over the long term.
The price of high-risk investments is influenced by the performance of the corporation it is tied to. Factors such as company management, earnings, and related news affect the company's stock price, making it risky due to fluctuation and volatility of the market.
The silver lining is that if the performance of the fund's holdings is stellar, they produce long-term gains that make them incredibly appealing. Their yield potential gives you the best chance to beat inflation over long periods, making them an essential part of a good retirement portfolio.
The Metro Equity Fund is designed for maximum growth potential. It lets you invest in diversified and fundamentally sound equities listed in the stock exchange, so you can yield higher returns.
The benefits of investing early for retirement
No matter which types of investments you choose, one piece of sage advice remains: start early. It gives your investments more time to grow even if you start small. This allows you to take advantage of the power of compound interest.
Compound interest is when earlier investment returns start earning their own returns, which then earn even more money in the future, snowballing over time.
Investing towards your retirement early provides you with the following benefits:
- You leverage the power of compounding--reinvesting your income to create a snowball effect with your annual yield.
- You have more time to recover from losses, so you can try higher-risk investments with higher potential rewards.
- You gain more experience and develop expertise in a wide variety of investment options.
Keep in mind that the objective and purpose of your investment are factors in your risk tolerance. Consider the different types of risk that could affect the performance of a specific investment. Then determine whether the investment is appropriate for your risk tolerance. You may discover that your risk tolerance is lower than you expected or perhaps you need to accept more risk to achieve your financial goals.
If your purpose is to build wealth for retirement and you are currently 30 years old, it’s best to start as early as now so you have around 35 years until retirement. This gives you enough leeway to invest in riskier instruments as you have a longer time to wait when prices fall. Having a longer investing horizon means more time and potential for your money to grow.
Let us say you’re 40 years old and the breadwinner of the family. Because your family relies solely on you for financial support, you do not have the liberty to be hasty about your investments. You have a lower risk tolerance because you cannot afford to lose much money. So, you choose a low-risk investment over a longer period. While the gains may not be as big, they are still guaranteed. You also don’t stand to lose as much money.
Best way to invest money for retirement
Investments that generate a higher risk of return, such as stocks, UITFs, and mutual funds, are good options for most people to grow their money. However, younger professionals with lower appetite for risk may stand to benefit from some of the safest investments for retirement. There is no right or wrong way to invest for retirement, as long as you’re investing.
Whatever your level of expertise or starting amount, you can put your good money habits to use and have a financial plan for every stage of your life. When you start investing, you are not only taking proactive steps to build wealth, but you’re on your way to making life more meaningful well beyond your working years.
Let Metrobank help you build your retirement fund. Visit your nearest Metrobank branch so you can ask us about your investment options today.
