Life is expensive. There’s no denying it and it certainly looks like the prices of pretty much everything will continue to go up. However, the bigger problem is that some of life’s biggest and often most important decisions cost a lot. While we can make do with a lot of things, there are some that we simply can’t avoid.
Each and every one of us will eventually need a large amount of money for our retirement. Eventually, we’d also want to start a family and sooner rather than later, we’d want to have a house of our own to live in with our newly established family. To fund these evolutions in life, we need a significant sum of money and the question is… where exactly do I get it? We’ll tell you one thing for sure – saving is definitely not going to get you it.
The only solution is to invest to achieve our goals and one of the most important things to note about investing is that it’s very closely tied to time. The more time you have to invest in something the greater the returns will be. It’s also important to know how you can invest to get there. It’s not all about the stock market. There are other less risky ways to reach each one of your objectives.
Here are some key life stages and how you can achieve the funds required for them and all you will need really is some time and a little planning.
Parents with young kids and are saving for college
Image from bbc.com
Investment goal: Child education
Time horizon: 18 years
Risk behaviour: Conservative
Opening a savings account in a child’s name may seem like a great way to give your junior a financial head start. However, it actually may not be the smartest thing to do. In fact, choosing the wrong savings vehicle for your children’s financial needs could cost them thousands in missed financial aid. In today’s environment, every parent needs to start planning for their child’s college fund as soon as they’re born!
This is why you need to plan far ahead to ensure your savings work hard for you to not only beat inflation but to also be at the right amount by the time your child is ready to go to college.
There are a few factors you need to consider when choosing the right product to put your child’s college fund in. First of all, the projected returns must always be above the inflation rate. Remember, this investment is for a long-term of a maximum of 18 years. You don’t want to be making returns only to find that at the 18th year you’ve actually ended up with less than you started with!
It’s also important for the money in your funds to be adequately liquid. Although you’re looking at an objective pretty far away, it’s still your child’s main fund. In the event you need the money before college time comes around you want that money to be fairly accessible. Investing in a bond or unit trust fund can offer you the right amount of liquidity, as opposed to investing in a physical property.
Of course, you want to start as early as possible. As we mentioned earlier, at birth is ideal. Based on our article about how much you need to save for your child’s education, you’ll likely need about RM200,000 to fund their college education.
Here’s how you can achieve that using a bond fund and how big a difference time makes:
Affin Hwang Select Bond Fund
Target amount: RM200,000
| Investment period | 18 years | 10 years |
|---|---|---|
| Average annual rate of returns | 6.1% | 6.1% |
| Initial investment | RM1,300 | RM6,000 |
| Monthly contribution | RM500 | RM1,150 |
| Total contribution | RM109,300.00 | RM144,000.00 |
| Total investment value | RM200,603.32 | RM201,476.29 |
| Percentage of projected returns | 83.5% | 39.9% |
Based on the example above, with 18 years to build your child’s college fund, you only need to invest a total of RM109,300 over 18 years or about RM6,072 per year to achieve your target amount of RM200,000. However, starting late, with only 10 years to build your fund, you need to invest a total of RM144,000 to get an amount around the range of your target. That means you’d need to invest more than twice the amount (RM14,400) every year even though there is only a difference of 8 years in your investment period!
Ready to kick-start your dream? Start now!
Individuals with a dream retirement in mind
Image from ncoa.org
Investment goal: Retirement
Time horizon: 30 years
Risk behaviour: Aggressive
It’s easy to understand why retirement isn’t an area of concern in your 20s. You are more occupied with kick-starting your career, and not about ending them. It’s worth noting that the time you have available to invest can play a huge role in determining whether you get a dream retirement or a never ending life of work.
It’s compulsory for employees in Malaysia to save 11% to 12% of their monthly salary to the Employees Provident Fund (EPF), while their employers contribute 12%. This makes a total of 23% to 24% of monthly savings for retirement. A lot of us think that this is enough but the fact is that even if you never make a withdrawal before retirement, you’ll still end up retiring short of what you really need.
According to the Organisation of Economic Corporation and Development (OECD), the average retirement replacement income for OECD countries (Malaysia included) is 57% of your last drawn salary. However, at the national level, Malaysia’s current replacement income ratio stands at 30% — 27% below average!
Based on Private Pension Administrator’s (PPA) research, the average Malaysian will have to set aside at least 33% of their monthly income to achieve 57% of replacement income. With EPF, we are only achieving 23% of savings. So we’re 10% short and remember this is if we don’t make any withdrawals on our EPF.
So, you will likely need to save at least an additional 10% of their income every month to make up for the shortfall. The investment product you decide to put that 10% into should be able to achieve consistent capital appreciation over the long-term. It should definitely at least be at the same rate of your EPF gains but ideally it should be ahead of it.
Here’s an example of how much an additional 10% can help boost your retirement fund if you invested it right:
Using Affin Hwang’s Select Opportunity Fund
| 23% EPF savings | Additional 10% savings | |
|---|---|---|
| Initial monthly salary | RM2,500 | RM2,500 |
| Average annual increment | 3% | 3% |
| Investment period | 35 years | 35 years |
| Initial monthly investment | RM575 | RM250 |
| Average annual rate of returns | 6.0% | 9.2% |
| Total contributions | RM417,188.36 | RM181,386.25 |
| Total investment value | RM1,187,848 | RM1,001,443 |
| Percentage of projected returns | 184.7% | 452.1% |
Based on the calculation above, you will only be walking away from employment with RM1,187,848 if you rely on EPF alone. Assuming life expectancy of 75 years, you will need to make this amount last 15 years. That’s a meagre RM6,599 of replacement income a month.
At the increment rate we’re taking, the last drawn salary will be RM6,829. With just the EPF money you’d only have about 96.6% replacement income
However, if you invest an additional 10% every month, you will get an additional RM1,001,443 post-employment boosting your retirement fund to RM2,189,291. That’s a total replacement income of RM12,163 every month which puts you at about 178% of your last drawn salary which is more than enough to meet the recommendation!
Just investing 10% a month gives you a 184% increase in your monthly replacement income during retirement. That’s a pretty good return!
Ready to kick-start your dream? Start now!
Young investors saving to buy a home
Image from cnbc.com
Investment goal: Down payment of a RM600,000 home
Time horizon: 5 years
Risk behaviour: Mid-level
One of the biggest immediate aspirations for young working Malaysians is to be able to buy their first home. However, this has proven to be a challenging task with prices of properties continuously escalating.
The biggest difficulty though lies in not the increasing prices but the hefty down payment required. To purchase a house valued at RM600,000, you’d need at least RM60,000 available to pay for the down payment. That’s not an amount most Malaysians have lying about.
However, with a strong saving and investing strategy, this can be achieved over a short period of five years. To choose the right investment vehicle, you must consider liquidity and rate of returns, as you will be expecting to access the funds if you suddenly spot a home you want to buy.
Here’s an example of how you could meet this objective by using the Affin Hwang Select Income Fund. This fund offers steady and regular income stream in the form of distributions over medium term.
Here’s how this fund can help make your dream of becoming a home owner come true:
| Target amount | RM60,000 (10% of property price of RM600,000) |
| Average annual rate of returns | 8% |
| Investment period | 5 years |
| Initial investment | RM5,000 |
| Monthly contribution | RM715 |
| Total contribution | RM47,900 |
| Total projected returns | RM60,335.42 |
With the help of an investment product, you only need to put away about RM47,900 to save up to RM60,000 in just five years. This is a lot easier than putting away RM1,000 every month for the next five years just to save up to buy your dream home. Not to mention, you’re essentially saving RM12,100 on your down payment.
Ready to kick-start your dream? Start now!
Always invest early
No matter what your investment objective may be, time plays the biggest role. You can see how greatly it impacts long term goals like savings for an education fund or retirement. Even with short term ones like saving for a down payment, planning ahead and investing can save you a lot of money.
When you begin your investment journey early, you give yourself a great advantage that only time can offer!
