Thursday, 18 December 2014

The Golden Age

A friend of mine asked me how much should he start investing in order for him to retire comfortable at the age of 60?

For those of you who frequent my blog would know that I am not a trained personal finance planner. Whatever I write are just my opinions only. As usual, I write with a little bit of common sense, some dry cold hard number analysis and a little bit of personal experience/observations.

Many people dream of having contented and enjoyable retirement years without of financial worries. However, with the escalating cost of living, it will be a challenge for many to save sufficiently and live comfortably during their retirement years. In fact, many may need to work past their retirement age to fund their living. Then there is the issue of healthcare, another area of utmost concern for the retirees.

While the question of whether one has saved enough money for retirement may seem a simple question, the fact that retirement is often many years away makes it more difficult.

Trying to answer it generates a number of other questions: Shell we have met the EPF Minimum Sum and will that be enough to meet my needs?

How will healthcare and living expenses change by the time we retire and how will they continue to rise after retirement?

Malaysians need to be more aware of their retirement needs and realise that Employees Provident Fund (EPF) contributions may not be sufficient to maintain their same living standards after retirement.

Some studies conducted in Malaysia have shown that most retirees spend all their EPF money within three years of their retirement. Given that the average lifespan for a Malaysian is 75 years, if we retire at 60 and spend all our EPF money within 5 years, a lot of us will be wondering how to survive from to 75.

The most worrying question that most of us will be asking is how to survive retirement when we lose our steady stream of monthly income to cover our daily expenses.
The impact of inflation on future living costs also needs to be considered. Even if inflation remains stable at 5% per annum, goods would cost more than 60% more in 20 years than they do now – a factor that too many people fail to take into account.

As Malaysian are living longer and are having children later in life, it is very possible that people may reach retirement age with both younger and older generations dependent on them. This needs to be taken into account in planning.

In reality, a lot of us have been spending most of our savings, including part of our EPF savings on our children’s education and clearing debts on house and car purchases, which leave us with not much savings for our retirement.

With this general concern in mind, let’s look into how much of our EPF money we can afford to spend to have enough for our retirement based on the our local conditions and some assumptions.

Generally, an average Malaysian starts working at 25 and reaches retirement at 55 (after 30 years of working), thereafter living the remaining 20 years (until 75) relying on the EPF savings.

We will assume a starting pay of RM1,500, growing at the rate of 8% per annum; an average bonus of two months per annum, average EPF returns of 5%, total EPF contribution of 23% (employer: 12%, employee: 11%) and inflation rate of 3%.

Our main objective is to test how much EPF money we can spend until we use it all up.

Our analysis shows that if we are able to live with just one-third (or 33%) of our last drawn salary, the EPF money should be able to support us for 20 years until we pass away at 75.

From the example below, if a person’s last drawn salary is RM13,976 at 55, he can only afford to spend one-third or RM4,612 per month after retirement (1/3 x RM13,976).

However, if his spending exceeds the one-third level, such as 50% or the full amount of his last drawn salary, his EPF money can only last 12 or five years respectively.

Even though our computations are based on a lot of assumptions and hypothetical scenarios, our objective is to bring to your attention that we need to be careful in spending our EPF money and control our expenses once we retire.

We will need to adjust our lifestyle after our retirement, especially for those of us that are used to spending most of our take-home pay when we are still working.

Once we lose the regular income source and are relying just on the savings, we will need to plan carefully in order not to out-live our savings. In this example, we can only afford to spend 33% of our last salary after retirement!

Everyone has different financial situations. However, we need to plan for our retirement. If possible, we need to build our own investment portfolio apart from the EPF savings. We may need to seek some part-time jobs after retirement if our financial resources do not permit us to stop working. Besides, we need to clear all our outstanding debts before retirement.

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