Reaching retirement with enough savings does not happen by chance. For most of us, it requires decades of saving, budgeting and working hard to increase our income to be able to put away some money for retirement.
The recent news by the government allowing Malaysians to withdraw RM10,000 from their EPF account 1, however, shows that not only are people struggling financially right now and need to use their retirement funds, but they also might not have enough for retirement. Even if you have been saving for many years, you may still find it hard to meet your retirement savings goals.
Hence, if you want to have peace of mind when you retire, you might want to start thinking about your future now and avoid some of the common mistakes that people make when planning for retirement.
Mistake 1: Not saving enough / started saving late
The saving rate for Malaysians today stands at 26.3%, having decreased by more than 10% compared to 2006, which was at 38.8%. That means fewer people are saving today compared to almost twenty years ago.
Not saving enough, or saving late, is one of the mistakes that you can make because you are missing out on the compounding effect that time can have on money saved.
With compounding effect, every ringgit that you save today will keep growing. The longer you accumulate your savings, the more your retirement funds will grow along with it.
For example, if you save RM15,000 in your bank that offers a 2% interest or profit rate per year, that’s an additional RM300 that you can get at the end of the year. Now, if you had saved RM500 per month into that same account for a period of 10 years, you’ll end up with over RM85,000 in savings, of which over RM10,000 is earned from compounding alone.
However, if you started saving the same amount later and saved RM500 per month for 5 years, you will only end up with slightly more than RM48,000 and just over RM3000 in compounding or interest. So, the key point here is to start early.
You should start saving as soon as you begin to earn a steady income or have a stable job. Of course, how much you should save can depend on how flexible your income is.
A great rule to follow is the 60/20/20 budgeting method, whereby you allocate 60% of your income for what you need (like bills, rent, groceries, food etc.), 20% for emergency funds (car breakdown, home repairs etc), and 20% for your savings.
Mistake 2: Spending all your bonus and taking on more debt
When bonus time comes around, you might think that you deserve to treat yourself to something nice. You should be able to buy yourself a treat, but if you spend your bonus on things that you must take on more debt to afford, you will end up using more of your own money to pay them off instead of contributing to your retirement savings.
This might not sound “exciting”, but instead of using that extra income/bonus on say a new phone or a shiny gadget, why not consider using it to clear off any debts that you have accumulated (credit card, student loans, etc.) and give yourself more room for your savings/investment pool.
The best way to utilise your bonus or extra income is to first make sure that all your bills, payments, emergency funds, and anything else, are taken care of. After that, whatever you have left, instead of just spending it, set up “fun” saving goals.
If you want to go travelling, set up a “travel savings”. Or if you want to get a new phone, make separate savings account for “new phone savings”. Allocate your extra income to what you want to enjoy after you’ve taken care of your savings through investments.
Mistake 3: Not accounting for unexpected changes in life
“You can plan a pretty picnic, but you can’t predict the weather”.
Life, just like the weather, can be unpredictable. You might have your whole life planned out, but odds are you’ll come face-to-face with some unexpected situations that will change your goals. This can be something common like dipping into your savings to pay for a major home repair or something unexpected like losing your job or a medical emergency.
This is especially true when it comes to healthcare costs, as our current medical inflation rate stands at 12%, six times higher than the annual general inflation rate, and you can expect that medical costs will skyrocket by the time you reach retirement age.
If you don’t plan ahead, you might end up using your retirement funds to pay for life’s unexpected costs.
Whenever an unexpected change happens in your life, it’s best to review your current retirement plans and assess whether or not you are saving enough and have enough funds set aside.
Plan ahead and budget for life’s milestones like getting married, starting a family, buying a home, and ensuring you have enough funds to extend your medical coverage to your retirement years.
Mistake 4: Having only one form of savings
The biggest key to a successful retirement is diversification. Yet, it’s the biggest mistake that people often make, as they tend to rely solely on their EPF savings when they retire.
In 2021, more than half of EPF members were unable to save enough to meet the minimum recommended savings amount of RM240,000 for retirement.
And while EPF is considered a steady retirement fund with its current rate of 6.10% per annum, it should not be your only source.
Your savings and investing approach should not stay the same as you progress from your 20s to your 40s, as your risk tolerance and financial commitments change over time.
Even if you are contributing to a mandatory retirement fund like EPF, consider spreading your retirement savings into other investments that generate long-term, consistent, and competitive returns with minimal risk.
Plan your retirement goals with Principal
Having the right mix of assets and investments across the board can ensure better returns on investment over the long run. Principal can help you get there with their goal-based investment solutions.
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