You’ve probably heard Suze Orman’s mantra: Pay yourself first! Her point was, you need to save and invest wisely because you have obligations to meet, emergencies to cover and the future to provide for.
Well, seniors, the future has arrived, you’ve retired, and you will still be spending, but for different reasons than when your nest wasn’t empty. Hopefully, your chicks have finally flown, you’re free of debt and have accumulated a nice little nest egg—one that, thankfully, has no potential to hatch into another chirpy mouth to feed.
That egg, though, does demand your attention. Why? Because that nest egg will make it possible for you to travel before your knees buckle—you can see I have my priorities straight—and cover living and medical expenses before you finally shed these mortal coils.
Forget the funeral expenses; my theory is that since your heirs didn’t work for the money and other assets that they are inheriting from you, let them worry about how to bury you. Besides, at that point, wherever you are in the afterlife—heaven, hell or in-between—you couldn’t care less.
Your responsibility at this point is to nurture that egg as carefully as you did your own hatchlings, because when that egg cracks the product should not be a breakfast ingredient, but a chick that grows up into a chicken that lays eggs. You get the picture.
You still need income, but you don’t want to be bothered by the problems involved in running even a small business or rental properties. The choice left to you is…money-lending. No, no, no, I don’t mean loan-sharking. I am referring to something classier. The elegant term is “investing in debt instruments.”
Fortunately for today’s seniors, there are more debt instruments now to choose from than there were 20 years ago. Not just time deposits and money market placements (short-term borrowings of private companies) but also bonds (long-term borrowings of government entities and private corporations) and a mestizo creature called a preferred share.
With preferred shares, you become both a lender and a part-owner of the corporation.
The most risk-free debt instruments are those issued by the government itself. Probably the most popular is a special deposit account (SDA) which is a debt of the Bangko Sentral ng Pilipinas (BSP) and has short holding periods, typically 30 days. You should do some comparison shopping on bank fees, because interest rates on SDAs are a little higher than time deposits (emphasis on little), so a reduction in your cost can make a difference.
For example, Bank A accepts a minimum of P50,000 for SDAs and charges a trust fee of .5 percent. Bank B’s minimum SDA is P1 million, but charges a lower fee of .3 percent, and it goes down even further for a larger deposit. If you have a large amount to invest, that .2 percent difference can translate into a tidy sum, plus you are hoping that your interest income, net of tax and fee, will be higher than inflation.
And steel yourself to resist the mournful expression of the account officer when you remove your funds from her high-fee bank to the lower-fee bank. Just remember that you’re the retired person who needs to maximize your funds, not her.
But don’t let excitement over a good deal override your common sense. Just because Bank B is granting you a better rate, don’t put all your nest egg into that one account. You need some emergency funds, not too much, in a simple savings account also.
Depending on your particular situation, you might even place a secondary emergency fund in a smaller SDA account with Bank A and the bulk in your account in Bank B.
You can also invest in treasury bills, which have holding periods ranging from 30 days to one year. From time to time, the government also issues retail bonds, meaning, the bonds are available in small amounts, usually P5,000.
Time deposits are funds you lend to a bank, not the government. For this reason, it is important to choose your bank very, very carefully and not get dazzled by an unusually high interest rate. High rate, high risk!
Time deposits are insured with the Philippine Deposit Insurance Corp. up to a maximum of P500,000 per depositor (NOT per deposit.)
There is a bewildering variety of time deposit products with varying features, so again, it pays to canvass and see which type of time deposits is suitable for you. Time deposits are also available in foreign currencies, such as the US and Canadian dollars and the euro, but the interest rates are typically lower than peso TDs.
If you, as a retiree, are thinking of a foreign-denominated time deposit as your major investment rather than as a temporary place to park your foreign exchange, you are betting against your own currency. In other words, you expect to make a profit from the depreciation of the peso. Which, at this point, might be unwise since what bothers the BSP at the moment is a too-rapid appreciation of the peso, rather than the other way around.
Pluses and minuses
You need to weigh the pluses and minuses of each type of instrument as well as match them to your particular circumstances.
Check out the tax factor; debt instruments with a holding period of five years or more are tax-free to the investor. The tax on dividends of preferred shares is just 10 percent versus the usual 20-percent withholding tax on interest on savings accounts and short-term placements.
As for the holding period—are you likely to outlive that 10-year bond or will it outlive you? You can always sell it, but the value of a bond can also fluctuate.
And there are restrictions for each type of debt instrument. For example, preterminating a time deposit will incur a penalty, and under no circumstances can you preterminate an SDA. So be sure to read the documentation.
You should also befriend your private banker. But don’t give him or her carte blanche to invest your money. Contradictory? Simple prudence. I really like my banker, who bends over backward to accommodate me and my questions, notwithstanding the modest size of my account.
But not everybody has the same experience. A friend nearly fainted when her banker, who was with a multinational bank, invested her money without her knowledge in papers issued by a European bank—this, at the time of the financial meltdown in 2008 in Europe and the US. She was able to recover her investment, but the thought that it was made without consulting her still rankles.
I know of people who do invest in foreign securities, and are happy with their investments. However, these are very sophisticated and knowledgeable individuals, having worked in finance with multinational corporations and familiar with foreign financial markets. But for the average Joe and Jolina (like me) who lack that depth of knowledge and experience, the rule is—stick to what you know.
Evaluate your banker’s recommendations. Is it really to your advantage to preterminate your old, higher-yielding bond to invest in the bond he’s recommending? Remember, he has a quota or budget to meet, and your old bond is not counted as part of that quota.
At the end of the day, the ultimate responsibility for managing your funds is yours (unless you fear that you’re on your way to developing Alzheimer’s, but that’s another story.)
At the height of the 2008 crisis, the evening newscasts were filled with gloomy stories of banks going under. I remember one news clip of agitated Chinese investors in HK, ordinary wage earners, milling around in the street outside a bank. And this was not a small-time bank, either; it was a name I recognized.
The scene was heartrending, but knowing the Chinese propensity for risk-taking, at the same time I did wonder, did they do their homework?
Because, caveat emptor: If something sounds too good to be true, then it IS too good to be true!