Depending on where you are on your career path, retirement may be far off in the future or may just be around the corner. Either way, you should be preparing to make sure you live comfortably during your golden years. If you work for a company and you’re headed towards working for that company until your retirement, then you will be receiving a retirement pay from that company, aside from government benefits like GSIS and SSS.
To get a clearer idea of how much you’ll get after retirement, we’ll show you how to compute for your retirement pay from your employer. But first, you should know whether you are eligible to receive retirement pay.
Are you eligible for retirement pay?
According to Presidential Decree No. 442, or otherwise known as the Labor Code of the Philippines, all employees are entitled to a retirement pay benefit from their employer if they:
- Retire with a minimum age of 60 years old;
- Have rendered at least 5 years of service to the company;
- Have no existing retirement plan with their employer.
This benefit covers all employees in most industries, but there are some exceptions. The retirement pay benefit does not apply to:
- Government employees;
- Employees of retail, service, and agricultural establishments; and
- Employees from establishments regularly employing not more than 10 employees.
Additionally, the employer may opt to substitute the retirement pay benefit for the Pag-IBIG Fund, as long as they regularly shared in the employee’s contributions. Confirm with your employer if they have a separate retirement pay for employees.
How to compute for your retirement pay
Per the law, every company is mandated to provide a minimum retirement pay equivalent to one half (½) of the monthly salary (the latest salary rate prior to retirement) for every year of service with the company. A fraction of working of at least 6 months will be rounded up to one whole year.
One-half of the monthly salary covers 22.5 days, accounting for the following:
- 15 calendar days’ salary (based on the latest salary rate prior to retirement);
- 5 days of service incentive leave (cash equivalent); and
- 2.5 days, equivalent to one-twelfth (1/12) of the thirteenth month pay. (1/12 x 365/12 = .083 x 30.41 = 2.5)
The formula for computing for your minimum retirement pay is as follows:
Minimum retirement pay = Daily salary rate X 22.5 days X Number of years in service
The daily rate is standard and excludes periodic increases in the salary, like the cost-of-living allowance (COLA).
Take note that this formula only calculates the minimum amount the law requires your employer to provide as retirement pay. Some companies are more generous and provide a full monthly salary for every year of service instead of one-half a monthly salary.
In the case that your employer has a separate retirement plan or opts for contributing to the Pag-IBIG fund instead, the amount that you receive from these options must not be less than the minimum retirement pay you would have been entitled to had there been no such retirement plan. If the amount from the employer is less, they should pay the deficit to equal the minimum retirement pay.
Retirement pay calculation example
Let’s say you’ve been working for your company for 15 years and 7 months and are now ready to retire as you’ve reached 60 years old. This makes you eligible for receiving retirement pay. Your years of service will be rounded up to 16 years. Your latest salary is set at Php 40,000/month or Php 1,333.33/day. The minimum retirement pay that you can get can be computed as follows:
Minimum retirement pay = Php 1,333.33 X 22.5 X 16 = Php 480,000
Will your retirement pay be enough to support you in your retirement?
Ask yourself, “what amount will be enough for me to live comfortably during my retirement?” If you already have your minimum retirement pay computed, you can try to visualize how much you will get every month if you space it out for a given number of years.
Let’s go back to the previous example. If you received Php 480,000 as retirement pay and is set to spend at least 10 years of retirement, the amount you’ll receive per month will be at most:
Monthly budget = Php 480,000 / 120 months = Php 4,000
Add to that the pension and other government benefits you will get from SSS and GSIS, and you will end up with a modest sum that may be enough to get by. But the ultimate goal is for us to spend our golden years comfortably without having to worry about any monthly budget.
The best way to prepare for your retirement is to not solely rely on your retirement pay and government benefits, but supplement your plan with more ways to fund your retirement. Consider retirement savings plans, investment funds, and other smarter ways to grow and protect your money for the future.
