Living off interest

TUESDAY, 16 AUGUST 2011 19:25 GEORGE S. CHUA / FREE ENTERPRISE

LIVING off interest or LOI as it is affectionately called in retirement circles is the holy grail of financial freedom. The term LOI is loosely applied to passive sources of income that can be depended upon with a fair degree of consistency, frequency, amount and for as long as you live or even longer! Therefore, this would include regular cash dividends coming from blu-chip stocks, a monthly pension provided by the government or other private institution, regular payouts from a trust fund, and all sorts of other long-term sovereign-debt instrument or corporate bonds with a coupon payment.

Everyone, including you, should aspire to be in the enviable position of being able to live off on interest, should you choose to do so. Government institutions, such as the SSS for private employees and the GSIS for government employees, are supposed to help you achieve this objective. In the case of the SSS, based on the current structure and on maximum contributions, the most you can ever hope to receive is a modest amount of just over P20,000 a month, and that would already be in truly exceptional cases of a very long maximum contribution history.

There is no such cap for government employees who can get up to 80 percent of their average monthly salary based on their last three years of service. Now, that is what I call a real pension plan, comparable to the best ones you can find anywhere in the world! This is certainly one case where government employees are much better off than their private-sector counterparts.

Even in the case of getting a retirement or separation pay from private companies, you can only normally expect to get from half a month to a month for every year of service. However, in some multinational and large progressive Philippine corporations, they offer a much more generous retirement program of as much as three months or more for every year of service. The normal practice here is that this is given on a lump-sum basis and there is no provision for a monthly pension program.

As a private individual, finding a way to structure your retirement so that you could live off interest would require a lot of advance planning and an investment strategy. First is to make sure you do pay your monthly SSS contributions regularly since this is a requirement of the law. While the pension amount may be small, it will nonetheless add to your regular monthly cash inflow.

Next is to aggressively save whatever you can so that you can already start making investments, including having your own house. While having your own home may not generate income for you, it will save you the cost of renting and you will have a place to stay in your old age. Of course, you would still need to provide for the payment of real-estate taxes, association dues, utilities and other maintenance costs. The upside is that over long periods of time, property values tend to appreciate so your investment in a house can add value to your nest egg.

Whatever else you save, you can invest in various money-market placements, government securities and corporate bonds. While the risk to your principal is very small, so is the interest rate yield on these instruments. At this time, yields on long-term peso instruments are between 5 percent and 7 percent.

Of course, there are other investment alternatives in the equities market. There are a number of established Philippine companies listed in the Philippine Stock Exchange that can be considered blue-chip stocks that do provide regular cash dividends that have a much higher yield than fixed-rate instruments. Although there is no principal protection on stock-market investments and there is always the possibility that the value of these shares may go down, historically, over a longer period of time, the value of these shares do go up.

In summary, get what you can from your SSS pension and put your savings in investments that would be able to provide you with a regular good periodic yield and has the upside of capital appreciation. Hopefully, you are able to get enough cash on a regular basis to go on a blissful, worry-free retirement through LOI.

(Comments may be sent to chua.george@yahoo.com)