5 Steps To Retiring On Your Own Terms

5 Steps To Retiring On Your Own Terms

Have you stopped to think about what it really means to retire? The difference is that you continue to go about with your life and daily expenses BUT without the monthly salary, you used to get from a job or being employed.

That brings us to the next question – how long can you survive without your monthly salary? According to the Department of Statistics, Malaysia (DOSM) survey, many Malaysians only have enough savings to survive for 1 to 4 months.

If your plan is to spend more time on your hobbies or even volunteer for your favourite charity, you will still need access to a fixed stream of income just to live life on your own terms after retirement.

So, what can you do?

Well, if you want to be able to retire on your own terms, then you’ll need to start taking steps long before retirement comes around with these 5 steps.

Step 1: Start saving as soon as you can

Experts would recommend that you put in at least 10% of your income towards retirement savings. However, if you’re just starting to enter the workforce and don’t have enough disposable income, then saving however little you can afford as early as possible can make a big difference in the next 20 to 30 years.

The trick is, however, to be consistent with your savings. Rather than choosing to save aggressively in a short time when you are older, saving consistently over a longer period ensures that you don’t need to take huge chunks of your salary all at once. Here’s how much more you can save if you start in your 20s instead of your 40s.

Person A who starts saving in their 20sTotal
Age: 23 to 30Saves RM200 monthly at 2% returns for 7 years18,264.72
Age: 31 to 40Increases savings to RM500 monthly at 2% returns for 9 years80,987.93
Age: 41 to 50Increases savings to RM600 monthly at 2% returns for 9 years167,779.96
Person B who starts saving in their 40s
Age: 41 to 50Saves RM600 monthly at 2% returns for 9 years95,611.92

Sample calculation source: https://www.calculator.net/investment-calculator.html

Of course, as you grow older, it’s a good idea to work towards saving 20% of your monthly income for your retirement funds as your salary increases over time.

Step 2: Invest early and beat inflation

Whilst saving money as early as possible is a good start, growing your savings by investing them is even better.

This is because what you earn in interest or profit rate for the money you put in savings accounts may be lower than the inflation rate. For example, the inflation rate in May this year has already gone up to 2.8%, which means the money you saved so far may be losing value while sitting in your savings account if the interest or profit rate is lower than that.

Investing can provide potentially bigger returns than if you had just put them in a savings account. Over many years, these investment returns can generate their own returns.

How much more are the returns? Let’s compare what happens if the 23-year-old who had saved for 7 years decides to invest the amount in an asset that can provide potential returns up to 7% each year instead of just saving money.

YearSavings with 2% returns p.a.Investing with 7% returns p.a.
0RM18,264.72RM18,264.72
1RM18,630.01RM19,543.25
5RM20,165.73RM25,617.21
10RM22,264.59RM35,929.47
20RM27,140.41RM70,678.70

Sample calculation source: https://www.calculator.net/investment-calculator.html

After 10 years of investing, the savings could potentially grow to over RM35,929.47 and after 20 years, that amount can even reach RM70,678.70 compared to RM27,140.41 by just keeping the money in a savings account.

Step 3: Be consistent with your investments

When you’re stepping into investments to build up your retirement funds, it’s important to understand that you might experience dips or losses along the way.

However, you can combat those losses by using ringgit or dollar cost averaging (DCA) to minimise the impact of your investments. With DCA, what you are essentially doing is that when the unit price is low, you buy more units, and when the price is high, you buy fewer units with the same amount of money invested.

The idea is that since, you’ve spread out your investments, any losses that you experience won’t be as impactful compared to if you’d brought all the units in one lump sum.

How do you use DCA?

Basically, instead of putting one lump sum into your investment, you spread it out over a couple of months or years. For example, if you’ve set aside RM3,000 to invest, instead of going in one lump sum, you could break it down into 12 months of investing RM250 monthly.

That consistency in investing a specific amount of money will be easier to maintain than if you had to save up huge amounts of money just to start investing.

Step 4: Diversify your investments to lower risks

Diversification is considered a basic principle of investing, but it might sound intimidating to someone who’s not well versed in the world of finance.

But, if you just focus on the first part of the word, diversify, all it means is to just add variety to your investments.

And diversification is necessary when you’re thinking about investing for retirement because you can spread your investment risks across a wide range of assets to significantly reduce the chance of you losing out money if one of your investments goes under.

Having a diversified portfolio also increases your opportunity for better returns as you could have multiple investments performing well.

Investment Idea!💡

There are multiple ways that you can approach to diversify your investments. These can be high-risk investments such as stocks or something more low-risk such as Amanah Saham Nasional Berhad (ASNB) and Tabung Haji funds.

If you’re not confident in going into the stocks market or have no access to ASNB, then you can consider EPF as it is a fairly safe investment with an average compound annual growth rate (CAGR) of 6%.

Principal Asset Management makes it easy for you to start investing through EPF i-Invest with just a couple of simple steps. Find out how here.

Step 5: Keep track of your investments and savings

If you’ve reached this step, then congratulations! You’re almost there in achieving your ability to retire on your terms. But don’t stop yet, because once you’ve put your savings and investments in place, you’ll need to check regularly to see if you’re still on track.

An annual review of your savings and investment targets can help you to identify if you need to make any changes to your finances in order to stay on track towards retirement.

What should you check regularly?

  • That you have access to enough cash and it’s not all locked up in investment assets
  • Review your risk profile every year or as your financial commitments change
  • Ensure that your asset allocation is in sync with your risk profile over time

There are many things that can impact your finances, such as life goal changes in the form of a mortgage or starting a family, market fluctuations that impact your portfolio, or just unexpected medical situations.

Retire on your terms with Principal

Just like in life, your investment portfolio allocation cannot stay the same over 10 to 30 years, and you need to keep track of it to increase your chances of retiring on your own terms.

But why stop there? Take the extra step to really make sure that your retirement plans are solid by having Principal take care of the investing with their goal-based investment solutions. From PRS (that gives you tax deductions!) to EPF i-Invest, ETFs, and even Islamic Funds, they will match your investing preference.

Get in contact with Principal Asset Management here!

Disclaimer
You are advised to read and understand the relevant Prospectus, Information Memorandum and/or Disclosure Document including any supplemental thereof and the Product Highlight Sheet (if any) before Investing. You should understand the risks involved prior to investing. You should compare and consider the fees, charges and costs involved and make your own risk assessment and seek professional advice, where necessary. Securities Commission Malaysia does not review advertisements produced by Principal. For full disclaimer, please visit here.

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