25th October 2022 - 6 min read
Let’s get straight to the heart of the matter: retirement is something that all of us should be concerned with, given that at some point, we will get to the stage where we are no longer able to earn active income. And this includes even those who are still in their 20s or 30s, who oftentimes think that they’re too young to think about building a retirement fund – except that no, that’s quite untrue.
In fact, retirement planning is something that you should start as early as possible because that means time is on your side; you’ll be able to plan and strategise, as well as reap returns that can only come with long-term savings or investments meant for retirement. Therefore, join me as I address some of the essentials of retirement planning.
In this section, we’ll focus on several key things that you should consider as you plan for your golden years, including how much you need for your retirement and how to save for it. But first….
Preparing for your retirement will allow you to do so comfortably, without having to significantly deflate your lifestyle. It ensures that even if your “income” may reduce slightly, it is still enough to meet your general expenses.
What you don’t want is for a severe gap to occur because your income has fallen post-retirement, causing you to be unable to meet your existing expenses and obligations. If this happens, you may be forced to adjust your lifestyle significantly, obtain a loan, or get someone else to fund your retirement – which can be quite unpleasant.
So we financial planners at RinggitPlus frequently talk about the need to achieve a millionaire status, and we always get asked why we stress that so often. Here’s the answer: for a comfortable retirement. Let’s look at the following table that shows how much you need in order to retire – based on your lifestyle:
So as you can see, if you want to retire in comfort – not even in luxury – you’re already going to need at least RM1 million in savings (to meet monthly expenses of between RM4,000 to RM7,500 across 20 years). As such, being a millionaire is no longer a luxury but more of a necessity.
Start by looking at your EPF savings; there are a few things that you can do just through this one channel to help boost and prolong the value of your retirement savings:
a) Put in more EPF contribution if you can
One thing that people aren’t really aware of is that you can actually top up your EPF funds. As a salaried employee, you are not limited only to the minimum EPF statutory rate of 11% that is regularly deducted from your monthly salary. If you feel that you can afford to contribute more, go ahead and top up your EPF savings! Perhaps put in an additional RM60,000 a year, which can then grow at a pretty decent rate of 5% to 6% annually.
b) Do not withdraw your entire EPF savings
Even though you’re allowed to withdraw your EPF savings at the age of 55 years old, you do not need to withdraw every single sen from the account. This is something that many people misunderstand; they get the idea that once you make an EPF withdrawal, you have to withdraw 100% of your funds.
Consider partial withdrawals instead, and only the amount that you need, so that the remaining sum can be left in your EPF account to continue generating profit from compounded interest and so on.
c) Plan your expected expenses during retirement in advance
Finally, plan ahead if possible. For instance, if you know that you want to retire and still be able to spend RM5,000 per month – barring any massive emergencies or purchases – then you can aim to save up to about RM1 million.
And from there, you can also plan how much to withdraw each year for your personal use, as well as how much to maintain in your EPF account so that it continues to provide consistent returns. This step also ensures that you remain disciplined in your expenses, instead of being tempted to make big purchases once you have withdrawn the full sum of your EPF savings at one go.
Outside of saving with the EPF, look at other investment assets that can give you better returns over time – specifically 9% and above. This percentage is obtained via two mathematical rules called Rule 20:30 and Rule 50:20, designed to calculate how much you need to save per day and for how long in order to obtain RM1 million.
Essentially, Rule 20:30 states that you can get RM1 million if you save RM20 every day for 30 years, while Rule 50:20 requires you to save RM50 every day for 20 years. This is under the assumption that the return of your savings is compounded monthly at an annual return rate of 9% – hence my advice earlier.
One investment asset that you can consider looking into are unit trust funds, although the portfolio chosen should meet a few key criteria. For instance, it should be a portfolio that does not cost too much, is growth in nature, and yet still provide sufficient liquidity. Here’s the framework that you can use to select a unit trust fund that is suited for you:
You may also want to check out if you can invest in your selected portfolios via EPF’s i-Invest platform within i-Akaun. The feature allows EPF members to invest their EPF Akaun 1 savings directly into approved unit trusts, with the sales charge capped at a maximum of 0.5% only. This is in comparison to the usual 3% fee if you were to invest via agents.
Finally, I’d like to state that I do understand the enormity of having to think about or plan for your retirement – it can certainly be intimidating, thinking about how to save up to a total RM1 million. That said, I also cannot emphasise enough the importance of taking this step as soon as you can because starting today and starting five years later will make a big difference.
In my next column, I’ll cover some of the misconceptions that people have with regard to retirement planning, so keep an eye out for that. In the meantime, you can catch my full discussion on this topic here:
This article was contributed by Azril Ikram, a licensed financial planner. To get deeper insights on your personal financial goals, check out RinggitPlus Financial Planner, a 1-to-1 financial planning service. RinggitPlus Financial Planner covers everything from tax efficiency all the way down to wealth planning and retirement savings.
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annual return rate of 9% is very difficult to achieve by most of the investment tools, you may find there are not many can even beat EPF of annual 5.5% return. Unit trust on the other hand, they do have other charges beside the sales charge. Do find out the detail like management fees, trustee fees and overall performances before you select the right one with matching to your risk appetite.