Can I Retire With Just RM1 Million?
A million Ringgit is definitely a lot of money. In the past, it was always considered “the benchmark” in terms of a person’s wealth. After all, having RM1 million officially makes you a millionaire. However, can RM1 million in your retirement outlive you?
With the average life expectancy of a Malaysian at 75 years old, and retirement age at 60 year old, your retirement fund should be able to last at least 15 years. If you spread RM1 million over a 15-year retirement, it only comes up to about RM66,667 a year or RM5,555 a month.
That’s not too small a sum if you are planning to retire in a small town, with no other financial obligations. However, if you want to maintain the same standard of living, with various financial obligations, that’s hardly enough.
You want to make sure your golden years are truly golden, and not a struggle for existence instead.
What is the retirement you envision?
There is no ultimate figure for retirement. Everyone has different needs and wants, and their retirement fund should reflect accordingly.
Here is a list of questions that you should be asking yourself to determine how much you need for your retirement:
- Are you a lavish spender, or a thrifty bargain hunter?
- Will you have passive income post-employment?
- Does your health require significant expenditures?
- Do you have adequate medical insurance coverage?
- When do you plan to retire?
- Do you have a sizeable contingency fund?
- Will you still have other financial obligations after retirement (child’s education, mortgage, etc.)?
- What is the average inflation rate?
- How many years more to your retirement?
If you have a pending mortgage, future healthcare expenses, and ongoing child education, RM5,555 a month is not going to cut it now.
Whether a million will be enough really depends on what you anticipate your post-employment life to be. If you decide to downsize your lifestyle, it might be enough to sustain your retirement years, but if you want to be off gallivanting the world, you may want to double that amount!
What number works for you?
According to AIA Group’s survey, Hopes and Aspirations of the Middle Class in Asia, the average amount that Malaysia’s middle class segment desires to have for retirement is RM1.9 million. In Malaysia, the survey was conducted among 500 respondents, aged 25 years above and living in Peninsular Malaysia, with an average household income of RM6,339 per month. Primary concerns raised by respondents in this survey was rising healthcare costs and the cost of unexpected emergencies.
So, how much is enough? You should base it on your income and your financial commitments, such as spending habits, expected healthcare costs, child support, and other pending loans.
1. The general rule of thumb
Your target retirement fund is closely related to your last drawn salary prior to retirement. According to Organization for Economic Cooperation and Development (OECD), the general rule of thumb is a target replacement rate of 70%, assuming that mortgage costs amount to one third of income and that they are generally paid off just before retiring.
If you are earning RM8,000 by the time you retire, your retirement fund or income should allow you about RM5,600 a month.
To achieve that, you will need to save one-third (33%) of your income, from as early as 25 years old.
With the Employees Provident Fund (EPF) savings, we will need to save an additional 10% of our income in an investment instrument that will be able to give us higher return and at the same time protect our fund from the rising inflation.
2. Needs and wants
Another way to estimate how much you need for retirement is by determining your monthly expenses and loan installments (if any) – and increase this by 5% annually to factor for inflation.
This sum is then multiplied by 16, based on a retirement age is at 60 and the average life expectancy of 75.
Inflation can erode your ability to purchase goods and services over time, it is important to factor inflation into your retirement planning goals. The higher the rate of inflation, the less purchasing power you will have over time. Remember, the rate of inflation varies from year to year.
If you are calculating your retirement fund using this method, don’t forget expenses like family vacations or a grandchild’s wedding gift. These can sometimes be as important as dental surgery or car repairs.
The inflationary threat
Someone who retired in 2014 with RM1 million at age 60 can safely withdraw RM66,667 a year. However, due to inflation, a 25-year-old today will need over RM3 million to have that same lifestyle when they retire (for this calculation, we assume an average inflation rate of 4% for the next 30 years).
It’s not just important to save up the required amount of the retirement fund, it is equally important to ensure that you are protecting your fund with an instrument that offers a higher return than the average inflation rate.
Do bear in mind that inflation rates differ year by year, and to be on the safe side, always assume a higher rate to ensure you have enough by the time you need the money.
When saving for retirement, start early. The later you start saving, the more you have to put aside every month in order to achieve your retirement goals, or worse, not being able to meet these goals at all.
Nothing can be worse than having to forgo the retirement that you deserve, and having to continue working through your golden years, while your other retired mates are blowing their retirement days smoking cigar at some beach in Bahamas!