Is RM1 million Enough to Retire?
Retirement is an essential transitional phase in life because it marks the beginning of a phase where we no longer need to work and no longer receive a fixed income every month.
According to the Department of Statistics Malaysia research, Malaysians' estimated average life expectancy is 74.8 years. If we choose to retire at the age of 60, this means that we still have almost 15 years left to continue life after retirement.
The issue of insufficient EPF savings is at a serious level, with 6.3 million members under the age of 55, or 48 percent, having savings balances of less than RM10,000 in their accounts as of 30 September 2023.
With savings of less than RM10,000, members are only expected to have a retirement income of less than RM42 per month for 20 years.
Studies show that we need at least half of our last salary to live comfortably, provided we no longer have any debt obligations, especially home and car loans.
How Much Do We Need to Retire?
Ideally, when we retire, we only need to consider the cost of living for ourselves and our spouse, medical costs, the cost of children who are still in school, and the cost of unforeseen emergencies.
Let's say the last net salary we received was RM10,000 per month, so we need at least RM5,000 monthly expenses after retirement.
Based on this estimated expenditure of RM5,000 per month and a life span of 15 years after retirement, we need about RM900,000 in retirement funds to enjoy retirement comfortably.
However, financial advisors will always encourage us to have more considerable retirement savings than this estimation as we are still determining what the future holds.
According to my 2022/2023 Budget Guide, the estimated monthly expenses for retired couples living in the Klang Valley are as much as RM3,210 which already covers living costs, medical costs, transportation, utilities and optional expenses. This cost is the highest compared to other cities.
Invest to Have RM1 Million
When building a retirement fund, we must choose low-risk investment instruments because they require long-term investment and commitment. So among the suitable investment locations are:
- Amanah Saham Bumiputera (ASB) or other ASNB fixed price unit trusts;
- bank fixed deposits and
- Unit trusts.
To determine the monthly investment required to accumulate RM1 million in retirement funds, you must specify the remaining investment period before retiring.
If you are currently 30 years old, you have 30 more years to retire. Assuming you receive an average return of 5 percent per year, you need to invest RM1,254 monthly to have savings of RM1 million.
If you are older, say 40 years old, you need to invest RM2,520 every month.
Why does the monthly investment amount increase with age? This is because when the investment period gets shorter, the frequency of the compounding power to grow money decreases, so the amount invested needs to be more significant.
Combined EPF and ASB
You may feel that this goal of building retirement funds is difficult to achieve, but remember that many of us have contributed to the Employee Provident Fund (EPF) since the first salary.
Ensure you also invest bonuses and any surplus money to further increase your retirement fund. Preferably, 50 percent of the bonus is invested consistently every year.
A combination of EPF and investment in ASB, for example, will help you make your dream of having RM1 million a reality.
Have Insurance/Takaful
It would be better if we retire and still have active insurance that can cover medical costs for critical illnesses and cover us and our spouse in the event of an unexpected event that may cause us to become disabled.
Make Sure The Retirement Fund Continues to Last
i. Total Use of Money Every Month
One of the crucial elements in ensuring that the retirement fund lasts longer is determining a fixed rate for the money that can be used each month. Among the guidelines that can be used is the Rule of 4%, which states that you can only withdraw 4% of the money from your retirement fund every year.
For example, 4% of RM1 million is RM40,000, meaning you can spend about RM3,333 monthly.
Controlling expenses will ensure that the money in the retirement fund remains invested and continues to survive through annual dividends.
For example, retirement funds in ASB will continue to receive dividends as long as the principal amount is still available. Therefore, only issue dividends or the necessary amount and ensure that the retirement fund in ASB continues to generate dividends every year.
ii. Budget to Monitor Expenses
A budget will help retirees to better manage their monthly expenses. Since financial resources are limited, every expenditure must be monitored to avoid waste. It is certain that we do not want the Retirement Fund to run out prematurely and cause us to have to work.
In addition to traditional methods such as notes in a notebook or Excel, there are many applications that can help us make a budget, such as Monefy, Spendee, and Wally, which can be downloaded on mobile phone applications.
iii. Avoid Spending on Retirement Funds for Unnecessary Things
One of the main reasons why most retirees run out of money quickly is because they use EPF or gratuity money to finance the cost of renovating their homes, children's weddings, and luxury vacations.
It's best to avoid things like this because it causes the money that should have been used to finance retirement to be used up so quickly that you may have to go back to work.
To Retire Comfortably, Follow These Steps:
1. Invest consistently every month from the first salary to build a retirement fund
2. Invest in low-risk instruments such as ASB or Fixed Deposit to build a Retirement Fund because it is a long-term goal
3. Do not withdraw money from Retirement Funds such as EPF arbitrarily because it will reduce the accumulated amount at retirement and
4. Have insurance before and after retirement for risk protection
