Retirement planning is one of the things all of us would have to think about at some point in our lives. The earlier we start planning for it, the better.
With the rising cost of living in Malaysia, many of us wonder if we could ever afford to retire at all.
For those of us still living from pay cheque to pay cheque, retirement can seem like a faraway illusion. The good news is, with clever financial planning, nothing is impossible.
If you have done your calculations and realised that you are not saving enough, perhaps it is time to cut down on your expenses on luxury items you don’t really need or find ways to improve yourself so you could get a better paying job.
Estimate Your Expenses Per Month
In order to calculate how much you would need to save in order to retire comfortably, you first have to estimate your monthly expenses as a retiree.
Today, assuming you already paid off your house loan, car loan and your children are financially independent, a monthly budget of RM2,000 would just be enough to cover the household expenses for two (you and your spouse). This is provided you don’t plan to live a highly social life and would prefer to stay home watching movies most of the time beside the occasional visit or outing with some friends.
If you would like a higher quality of living where you could still visit restaurants and shopping malls regularly, then you would probably need at least RM5,000 a month.
Factoring in the cost of inflation by the time you retire, you would probably need at least 2 times the amount you’ve budgeted per month, which would translate into RM2,000 and RM5,000.
Find Out How Much You’ll Need Per Year
Now that you’ve calculated how much you might need per month, you need to figure out how much that would amount to per year, after factoring other yearly costs that might come into play.
- Living Costs
Your living costs would mainly consist of your monthly expenses that will be used to pay for your phone bills, electricity bills, maintenance, satellite television, broadband and groceries.
Assuming a monthly expense of RM4,000 on the low side to RM10,000 on the high side, you will need anywhere from RM 48,000 to RM 120,000 a year.
Throw in a further RM10,000 to RM20,000 per year for short vacations, you will need RM58,000 to RM140,000 per year.
If an emergency happens, you might not have enough to cover the cost given your already straining cost of living.
That is why, we recommend that you take out an investment linked insurance policy and medical card that could cover the cost of most medical related emergencies that comes with an investment units-linked cash value from which you could withdraw funds from.
For good measure, let us just throw in a further RM10,000 per year for contingency expenses.
- Dependants & Financial Commitments
By the time you retire, it should be presumed that you will not have any more dependants or financial commitments by then. Your children should all be working and financially independent while your house and car loans should have been fully paid off.
Unless you are fortunate enough to have earned enough to do so while you were young or come from a wealthy family, you will probably have to keep working until you have fully paid of your financial commitments and until your dependants become independent.
There are just no two-ways about it.
EPF As Your Main Interest Generator
With those numbers in mind, you would probably need RM68,000 per year on a low side to RM150,000 per year on the high side to retire comfortably.
What you want to achieve when you retire is to not have to rely on the money you have saved up over the years to fund your living expenses. Instead, you should aim to save enough so much so that the annual interests earned on your capital alone is sufficient for you to sustain your lifestyle entirely.
Assuming an average interest rate of 5% from your EPF, you need to have at least RM1.4 million to RM3 million to get an annual interest of RM68,000 to RM150,000.
Private Investment Portfolio
For most people who are just working regular jobs, that amount is quite impossible to attain. Hence, for most of us, there is a need for us to set up our own private retirement portfolio.
What we would be looking out for in a private retirement fund is a low to medium risk fund that could give us an average annual return of 9-15% over a long duration of time that also allows for flexible withdrawals.
In this case, an investment linked policy tied with a balanced insurance fund might seem like a good fit. It is also possible for you to work backwards with your insurance agent to find out how much you need to save per month or per year to achieve a portfolio amount that you would require to retire by the time you want to retire using your insurance companies internal projection calculator.
Assuming an average annual return of 9-10%, you then need to achieve a portfolio size of at least RM700,000 or RM1.6 million to generate an annual return of RM68,000 to RM150,000.
But of course, such investments are risker than EPF since there is no guarantee on how the funds will perform and they will also be subject to bad economic years.
However, if you were to study the best insurance balanced funds out there, their performance would exceed their projections more often than not when averaged out over a span of 20-30 years.
Ultimately, the risk still exists and it is up to us to do our due diligence to pick the right fund and move our units from low-risk to medium risk funds according to market conditions. If you are able to master the art of doing that, then hitting your target savings amount to retire should not be a problem.
Start Your Retirement Plan Now
Furthermore, if learnt how to build a diversified investment portfolio and take advantage of the stock market during boom cycles, you might be able to double your capital every 10 years or so to contribute towards your final portfolio amount by the time you retire.
The earlier you start, the less you’ll have to save on a monthly basis to achieve your retirement savings target due to the extended period in which you will be saving and the extended time for interests to accrue on your savings.
Hence, make it a point to start your retirement savings plan as soon as possible before its too late!
Read Also: How And When Should I Start Investing?
DollarsandSense is a website that aims to help people make better financial decisions, one interesting bite-sized article at a time. Like us on Facebook to stay in touch with our latest article.
DollarsAndSense Malaysia is a website that aims to help people make better financial decisions, one interesting, bite-sized article at a time. Like us on Facebook to stay in touch with our latest articles.