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The Billion Peso Couple

The high-earning, high-living couple does not have problems with accumulating wealth. Their problem is how to protect it

By Hazel Ann Acuña

Ernesto Gotanchan, 58, is a businessman and owner of many commercial and residential real estate properties while his wife Elizabeth, 40, works in an offshore bank as head of the corporate loans department. Ernesto has five children, the eldest—his 24 years old daughter—with his first wife, who passed away, and four sons with Elizabeth, with ages ranging from four to 13.

The couple has gross earnings of P5,000,000 a month, mostly from rentals of the commercial and residential properties of Ernesto. His total collections every month is a minimum of P4,500,000 from his properties in Makati, Mandaluyong, Quezon City, Laguna, Cavite, Tacloban and Cebu. Elizabeth earns a monthly salary of P500,000.

The Gotanchan family is living the good life, with a residence in Forbes Park in Makati, membership in the Yacht Club, and an almost unlimited budget for cars, clothes, and casinos.

They have a net worth of more than half a billion (see Table 1: Net Worth Statement).

Table 1: Net Worth Statement

Ernest’s income-generating real estate holdings include commercial buildings, apartments, condominium units, house and lots, warehouses, boarding houses, and vacation houses, constituting the bulk of their assets. Nevertheless, the couple own deposits, stocks, offshore investments, etc., managed by top private banks, which provide diversification across asset classes.

However, their non-real estate assets show that their risk tolerance is conservative. The couple mentioned that the types of investments they are comfortable with are low-risk investments because of their upbringing and fear of getting into scams.

They don’t have a problem with debt, since their debt-income ratio is manageable: 18.68 for Ernesto and 3.06 for Elizabeth.

Their idle funds are intended for their retirement. Ernesto wants to retire when he turns 65, preferably in Europe to enjoy the museums and art galleries in his old age. He also wants to transfer and donate a portion of his investments, particularly his properties that generate rental collections, to his only daughter who will be 31 by then. Elizabeth on the other hand wants to retire at 60 and spend her golden years donating to foundations and charities.

The high life

Ernesto’s eldest daughter, who lives on her own, gets an allowance of at least P50,000 a month and capital for her three businesses. His first wife died from heart disease. His younger children study in exclusive schools and are expected to take advanced degrees in London.

Indeed, they are living a charmed life. With their current monthly income of P3,400,000 net of taxes, they spend as much as P2,860,000, for an expense-income ratio of 0.90 (meaning they only save 10% of their income). While it’s a positive cash flow of P540,000, they obviously are living in the here and now (see Table 2: Cash Flow Analysis).

The rental income is substantial, but there’s always a risk of collection problems and bad debts, which is in fact something that is already happening at some their properties. This can affect their cash flow, and may even force them to dip into their savings.

One way to mitigate this risk is to set up an emergency fund equivalent to at least two months of expenses, which is around P68,640,000. The other thing they need to do is decrease their discretionary expenses, which is already 45% of their income after tax. Specifically, they should cut down on their casino spending and gift giving, which comprise 70% of the total discretionary expenses. Doing these will not affect their lifestyle at all and should bring down their discretionary expenses by 20%.

TABLE 2: CASH FLOW ANALYSIS

SUMMARY

If there’s a will

Cutting down on discretionary expenses and boosting their investments should generate a higher net cash flow and help achieve Ernesto’s goal to have a billion peso net worth when they retire. What they haven’t planned enough for what will happen to their wealth when they’re gone.

The couple has no will. They plan to establish one right away with the help of their lawyers. Ernesto wants to copy what her mother did, which was to donate her properties to him while she was still alive. Because of that she was able to guide and help manage the properties well.

Ernesto has a pre-nuptial agreement with Elizabeth, in order to protect the interest of his only daughter. He also mentioned that his Cebu and Tacloban properties are assets of her first wife and must be given to his daughter. Aside from that he wants 50% of all his properties in Luzon to be given to his daughter. The other 50% will be divided to Elizabeth and their four sons. Two thirds of his other investments will also go to his daughter and only 25% will be given to Elizabeth and his sons.

To prepare their estate plan, the various tasks were assigned to their accountant, lawyer, and financial advisor, who will coordinate with the property appraisals, make the computations, and file the required documents.

There are three options available to the couple: pass on their properties upon death, in which case they pay a hefty estate tax; donate their properties while they’re living, which is Ernesto’s preferred route; or transfer their properties to a family corporation.

The first step is to compute their net estate (see Table 3: Net Taxable Estate) and resulting estate tax. Assuming that they use up all their savings and investments for retirement, that leaves only their real estate properties worth P361,000,000 that their children can inherit. The estate tax due after allowable deductions amounts to P69,665,000.

TABLE 3: NET TAXABLE ESTATE

ESTATE TAX DUE

The second option is to transfer their properties via donation, since the tax rates are lower (15% versus 20% for estate tax). They call also transfer over a number of years so that they can relinquish legal ownership gradually. Using a 10-year schedule of donations, based on P378,000,000 worth of properties, the couple will be able to save P17,925,000 in taxes, since they will pay a lower P51,740,000 in donor’s tax.

TABLE 4: DONORS TAX COMPUTATION

The third option is through incorporation of assets. If Ernesto converts all his real estate properties worth P378,000,000 into shares of stocks with par value of P500,000, he will receive 756 shares. Transferring his assets into a corporation is tax-free at the time of transfer. However, it only delays the payment of taxes since his resulting shares of stocks will still have to be part of his net taxable estate.

So the best strategy is through donation since it will save the couple P17,925,000 in taxes. Since the donation will be spread over 10 years, they will be able to schedule the tax payments for minimal impact to their cash flow.

By Randell Tiongson

Ever wondered how Filipinos view retirement planning? We conducted a short survey with 100 respondents answering 10 questions: 1) Age, Sex 2) Profession 3) Annual Income 4) Desired Retirement Age 5) Do you have a structured retirement program in place? If so, what kind? If not, why not? 6) Do you think you will have enough money to live your retirement age comfortably? 7) In your opinion, when is the best time to start planning for retirement? In your opinion, what is the best investment for retirement? 9) In your opinion, why do you think Filipinos are not too interested in retirement planning? 10) Do you think it is a good idea to talk to a professional to help you with retirement planning?

The ages ranged from 21 to about 50 but the average age was between 30 and 35. Interestingly, there were more males who responded than females. Average income was also diverse, from minimum wage earners up to millionaires.

For the other questions, the answers were very similar. Most of the respondents prefer to retire earlier that the usual 60 or 65 years old. Average target retirement age was about 50 years old. It seems many do not see themselves working very long and would like to get out of the rat race earlier than most. Here’s a disturbing revelation: while majority wanted to retire early, many of them do not have any retirement program in place. It makes you wonder how serious they are in wanting to retire early – it might just by wishful thinking for most of them.

For question 6, most agree that they may not have enough money to retire comfortably. As for when’s the best time to start planning, they were unanimous in stating “the earlier, the better” principle applies – from the time one earns income or at least when one hits 30 years old.

For the best investment for retirement, the top three answers were real estate, time deposits, and savings. There were very few respondents who made mention about more sophisticated instruments like life insurance, mutual funds, unit investment trust funds, stocks, bonds, or structured notes. Ironically, quite a number of respondents came from the financial services industry. If our respondents are an indication of the average middle class Filipino, you can surmise that we remain to be largely unsophisticated when it comes to investments. It is no wonder our capital markets are still highly undeveloped with most of the funds invested in short term savings and time deposits.

When asked why they think Filipinos do not take retirement planning seriously, respondents talked about immediate gratification, mañana habit, lack of funds, low income, increasing expenses, wrong priorities, short-term thinking, lack of knowledge, etc. Here’s an interesting explanation from respondent: “Filipinos are not too keen on preparing for their retirement maybe because of what we call the extended family. Further, most parents are too busy preparing for their children’s future and they tend to forget to prepare for their old age. They will simple say, if I can provide a good future for my children they will look after me during my old age.” This has been referred by some as Filipino retirement planning, and this mentality is something that needs to be reconsidered.

With regard to consulting with a professional, nearly all respondents thought it was a good idea. At least they acknowledge they will need help in this important area. This survey is a good reminder for all of us to take retirement planning more seriously.

The Bible actually talks about preparing for the future – many refer to it as the Storehouse Principle. Come to think of it, retirement planning is just like filling our storehouses. Let us be consistent in filling up our storehouses so that when the time comes, we will have enough supply for our needs. Retirement planning is no different – we must be faithful in allocating for our retirement so the when we do retire, we will have more than enough. Just as God blesses the storehouses in the biblical times, God will bless our financial plans as well. Remember though, if one does not have a storehouse (or a retirement program in this case), what will God bless then?

By Heinz Bulos

You’ve finally worked the numbers. And they fall short. What to do when a comfortable retirement seems beyond your reach? Here are five ways:

1. Delay your retirement date
If your savings have not caught up with your plans, you just have to bump up your retirement date. The HSBC report called “The Future of Retirement” indicated that the average retirement age is 62 for Filipino men and 57 for women. If you’re thinking of quitting work when you’re 60, push it back a few more years. If you’re employed, the mandatory retirement age is 65, but you can try to arrange a consulting gig with your employer.

2. Work at least part-time
Retirement doesn’t have to be no-work and all-play. It should be financial independence, not an end to your productive years. The HSBC study also showed that most Filipino respondents plan to work at least part-time during retirement. That’s because, according to the study, “in transitional economies, people cannot usually afford to retire when they would like to.” But it also noted that Filipinos planned to work as long as they can not just to remain self-sufficient but to keep themselves physically and mentally fit.

3. Rebalance your investment portfolio
You may be too conservative an investor. In case most of your money is invested in traditional time deposits or money market placements, BDO Private Bank Wealth Advisor Joby Lizares says you should consider “allocating to longer and higher yielding securities like bonds, structured products, UITFs, mutual funds, and equities—depending on market timing and conditions—and other products that your private banker or relationship manager can advise and offer.”

4. Make money from your home
You’re facing an empty nest, so consider selling your house and move to a smaller and cheaper one. You can use the cash left to augment your retirement savings. Another option is to take out a home equity loan.

5. Cut back on your expenses
If you have to, lower your expectations and cut down on your retirement dreams. Forego the planned annual trips abroad or forget about the beach house you’re eyeing. Consider moving to another city or province where property values, food, and recreational activities are much cheaper without sacrificing your quality of life.

By Heinz Bulos

It’s not surprising at all: Filipinos are not planning for their retirement. A global survey by HSBC called “The Future of Retirement” showed that over 80 percent of Filipinos surveyed have no sense of urgency when it comes to retirement planning and have not sought professional advice. Many are just not ready for it. Are you one of them? Here are three reasons that can hold you back.

1. Poor planning
For the more affluent, it’s not so much a lack of planning that’s a problem but not planning right. Joby Lizares, Senior Assistant Vice President and Wealth Advisor of BDO Private Bank, explains that while their clients do save for retirement, there are cases where they may have overlooked certain aspects: “There are those who believe that what they have accumulated over time will be sufficient to finance their retirement. However, when someone retires, he will have more time to do more things. These unexpected expenses may not have been taken into account in the first place.”

Aside from under-estimating retirement costs, Joby adds that another mistake is under-estimating the inflation rate, which includes a basket of only basic goods. But you don’t plan to retire on a subsistence income, do you? If you have dreams of being a jetsetter, driving that sports car, or buying a vacation home, jack up your inflation rate assumption.

2. Inadequate savings
Even if you have a solid retirement plan but you’re not socking away enough to fund your future, it’s just not going to happen. Unfortunately, saving for retirement is not a priority when you’re in your 20s or 30s, when getting married, raising children, renting a townhouse or condo unit, financing a car, and paying bills are your main concerns. By the time you hit middle age, you’ll be paying for college costs, buying cars for your kids, and spending for family vacations. It becomes harder if you continue to borrow to finance your spending habits. Joby advises that you have to make lifestyle changes to reduce your expenses.

3. Relying on others
The HSBC study revealed that, compared to the global average, there was greater dependency among Filipinos on the government, their employers, and their families for support in their retirement years. Only 36 percent of all Filipino respondents expect to fund their retirement themselves, in contrast to 44 percent globally. The fact is, however, social security and even your retirement pay are not enough. Putting the burden on your children, while culturally expected, is actually unfair, especially at a stage when they are supporting their own kids. It may be fine to expect some financial support from them, but the bulk of your retirement savings should come from you.