How much to earn from PERA investing

Updated by

In an earlier article, I talked about how PERA account is a great investment option to prepare for retirement that comes with loads of tax-free benefits. As a voluntary savings program, it is the Philippines’ version of the US 401(k).

Employers may even choose to contribute towards it, and you may save up to the maximum limit, which is P200,000 for overseas Filipino workers (OFWs) and P100,000 for those earning an income in the country.

But how much does a PERA account earn? That’s the question I’d like to explore in this article.

PERA investment

While many of us are worried about getting old and losing the ability to work, there are only a few who are doing something about it.

The PERA account was established by law through the Bangko Sentral ng Pilipinas. Its primary financial goal is to give everyone an chance to retire with comfort later in life. This is done by saving as early as possible. Your savings are put into different options to invest to let your money grow over time.

The great thing about the account is that you are given the option on PERA investments. Here are your choices:

PERA potential earning

So this brings us to a very important realization: the potential earning of your account depends on the investment you choose.

Buying shares of companies like Jollibee may not have the same growth as, say, investing in government bonds. The former has higher past growth but is very volatile, the latter is relatively less risky and earns modest interest. In short, earnings vary and are not guaranteed.

That’s why when you open an account, the law requires that an administrator walks you through the process. This way, someone can help you make the decision.

Factors that would be considered in coming up with the appropriate investment would include your current financial status, the level of risks you’re willing to take, number years before retirement, etc.

Approved PERA investment funds

While there are many options that you see, I can only find 10 investment funds that are approved to be offered under the program. They are managed by Banco de Oro-Unibank, Bank of the Philippine Islands, and Landbank.

The funds fall under the following categories:

BDOBPILandbank
BDO PERA Short Term FundBPI PERA Money Market FundLandbank PERA Money Market Fund
BDO PERA Bond Index FundBPI PERA Equity FundLandbank PERA Bond Fund
BDO PERA Equity Index FundBPI PERA Corporate Income FundLandbank PERA Global $ Fund
BPI PERA Government Fund

PERA equities fund

Index funds mirror the growth of the stock index, which is composed of the blue chips or Philippines’ top 30 companies whose shares are traded in the Philippine Stock Exchange. For more information, here’s a great guide about index funds.

According to BDO, this fund is not for short-term because of how it can be very volatile.

PERA bond funds

For bond funds, the BDO PERA Bond Index fund comes in next in terms of ROI with 5.60% return. It is designed to follow the returns of the Markit iBoxx ALBI Philippines 1-5 index. Among the assets it buys and sells are listed fixed income, government securities, or bank deposits.

PERA short-term fund

The third on the list is PERA short-term fund. Its goal is to offer people a way to preserve capital that is liquid and earns income by investing in money market securities.. It is primarily invested in fixed income securities such as special deposit accounts and bank deposits.

Effect of fees on PERA earnings

So the first projection that I’m going to make would be to assess the impact of fees on your return on investment (ROI). It is kind of hard to make a comparison for all funds, and so this example only shows BDO PERA Index Fund. I have also included a zero-fee fund, which does not exist in reality, as a benchmark. This is what we’re going to use as a means of comparison.

On overview of PERA, the management fee ranges between 0.20% and 1.50%. In the table, the following assumptions are used.

  • These are projections. Actual results vary.
  • Time horizon of 30 years.
  • Rate of return is 10% per year.
  • Deposit is assumed to be 10,000 pesos one-time and 1,000 pesos monthly.
YearDepositZero-fee0.20%1%1.50%
122,000 23,670 23,623 23,434 23,315
234,000 38,767 38,578 38,063 37,742
346,000 55,440 54,996 53,994 53,645
458,000 73,853 73,020 71,343 70,963
570,000 94,187 92,806 90,236 89,822
10130,000 232,489 224,837 213,124 212,490
15190,000 459,697 435,358 401,336 400,365
20250,000 832,972 771,025 689,599 688,112
25310,000 1,446,237 1,306,237 1,131,095 1,128,818
30370,000 2,453,819 2,159,617 1,807,281 1,803,793

The above table just shows the impact of these fees if all funds have the same earnings. In reality, different funds have different forecast of earnings and different fees. For instance equities may be volatile with higher growth potential, while bond funds and money market funds may have lower risks but also moderate gains.

What’s clear from this table is that the choice of your PERA fund determines the amount of earnings that you’re going to get in the end. Fees are going to impact your gains in a significantly negative way. And if you add the tax credits worth 5% of the amount that you put into PERA each year, then the total benefits would actually be 72,610.77 pesos more which can be used to deduct from your annual income tax. (Tax credit is adjusted with inflation of 3% three decades into the future.)

However by saying that, please be aware that there is a reason that funds have cheaper management fee. Maybe there is relatively less resources involved in the operation of these funds, or that they’re profiled to have less potential for growth.

PERA earnings in various returns

Now, there really is no reliable way to measure the returns of your PERA investment. They’re all non-guaranteed and subject to market forces. That’s why in this forecast, instead of choosing just one rate of return just like the previous example, the returns are assumed to be 4%, 8% and 12%. The management fee is also no longer computed into the table, and that’s because it is assumed that the net-asset-value per unit (NAVPU) of the PERA fund already reflects this.

Again the assumption is that the investment is made for 30 years and an initial capital of 10,000 pesos and 1,000 pesos for monthly for additional investment. Of course, you may also add the tax credit of 72,610.77 pesos should you want to take advantage of it against your annual income tax.

YearDeposit4%8%12%
122,000 22,663 23,333 24,009
234,000 35,833 37,732 39,700
346,000 49,529 53,284 57,273
458,000 63,774 70,080 76,955
570,000 78,588 88,219 98,999
10130,000 162,036 203,148 255,846
15190,000 263,563 372,017 532,264
20250,000 387,086 620,141 1,019,406
25310,000 537,371 984,716 1,877,918
30370,000 720,215 1,520,397 3,390,909

Take-away

When choosing a PERA investment, going for a fund with the least fee makes your investment cost-efficient. Sadly, there are very funds available in the market to date that there aren’t that many options from which to choose. Also the fees in all of our funds in the country are way higher than the ones offered abroad.

References

Tags

Read next

1 thought on “How much to earn from PERA investing”

  1. PERA is certainly a step in the right direction, no question about that. It is sad that it took nearly a decade after government approval to actually be implemented at the first two banks. When I first learned about these accounts, I immediately did research thinking a PERA account should be established for my beautiful bride, a Philippine citizen. I quickly learned that only one class of investment is offered by the banks at this time. Why is that? My personal opinion is GREED. The banks want to “heard the cattle” into their own funds with high management fees. Please note that the very same banks that offer PERA accounts also have brokerage services so there should be NO issue for account holders to trade stocks on the PSE or the ETF I mention below. No individual stock trading offered yet! If an investor wanted something similar to an index fund, they need look no further than FMETF, the only ETF (Exchange Traded Fund) on the PSE. Simply look it up on the PSE site and compare the annual fee for this ETF vs ALL of the bank funds. Believe me when I say that over many years, 1% to 1 1/2 % in annual fees will make a HUGE difference in what you accumulate. May I also point out that while a US style 401 plan is good, and you pay no tax on money added to the 401, there is a point where you MUST begin taking withdrawals. That is called an RMD (Required Minimum Distribution) That money withdrawn from a 401 is fully taxable at your current income tax rate, NO FREE LUNCH. We also have ROTH retirement accounts in the US. Contributions made to a ROTH are NOT tax free, you pay tax on the money first. However, all earning and the capital you added over the years are withdrawn TAX FREE. There is also NO RMDs on a ROTH account. Your money may continue to grow until you wish to make a withdrawal. I am very happy that the Philippine government “borrowed” the best parts of both types of retirement savings plans. Now, if the banks would only get with it so Philippine investors could grow their wealth more efficiently.

Write a comment

Thanks for leaving a reply.

We encourage you to keep the conversation engaging, safe, and meaningful. Your email address will not be published on the website. Please avoid the use of keywords on the name field. All comments are subject to approval before being posted to the message board. For more information, please visit our comment policy.