The Complete Roadmap To Saving And Investing For Retirement

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You’ve probably heard this before: many Malaysians are unprepared for retirement.

A recent World Bank study found that almost 75% of Malaysians contributing to their Employees Provident Fund (EPF) have account balances below RM250,000 at age 54. The World Bank’s simulations suggest that this would result in a retirement monthly income of less than RM1,050.

This could mean that relying on your EPF savings for retirement is not enough. But how do you know how much you need for retirement, and how do you achieve that number? Here’s a step-by-guide to planning your retirement.

Set your retirement goals

The first step to reaching your retirement goals is to actually know what your goals are. This means taking into account:

  • When do you want to retire? Do you want to retire at the minimum retirement age of 60, or even earlier?
  • What kind of lifestyle do you want and can afford? Do you want to maintain your current lifestyle, cut back on expenses or spend your golden years in luxury?

Once you’ve decided on these questions, you can work backwards from your goal. You can use the Private Pension Administrator Malaysia’s (PPA) retirement calculator to help you estimate how much money you’ll need in retirement. Here’s an example:

  • Let’s say you are a 30-year-old earning RM5,000 a month.
  • You get a salary increment of 3% every year, and you want to retire with 2/3 of your income to maintain your living standards.
  • You plan to retire at 60, and you expect your funds to last until you’re 80.
  • Based on these assumptions. the PPA calculator suggests that you may need RM1,725,385 to retire.
  • If your EPF savings amount to RM1 million by the time you retire, this means that you’ll have to make up the RM725,385 gap through other investments.

Analyse your current finances

Before you start investing, you need to get your budget sorted. Here’s how:

a) Set up an emergency fund

An emergency fund refers to money that you’ have set aside to pay for unexpected events, such as a vehicle repair or a sudden job loss. The EPF suggests setting aside at least six months’ salary as your emergency fund. It’s important to have these savings before you start investing, so you don’t have to dip into your investments during emergencies.

b) Look at your cash flow

Next, you’ll want to know how much money you have going in and out. This helps you adjust how much you can save for retirement.

Start by tracking all your income and expenses for a few months. This helps you see how much you’re saving every month. Besides that, when you’re aware of how much you’re spending on certain categories, it can be easier to cut down on unnecessary expenses later.

c) Pay off high-interest debt

Before investing, you should also pay off any high-interest debt, such as credit card bills or personal loans. That’s because these debts can incur high interest payments. For example, let’s say your credit card balances incurs an 18% p.a. interest rate, but investing only delivers an average return of 7% p.a. In this scenario, you’ll end up paying more on your credit card balance than you’ll earn by investing, so you’ll want to get rid of your high-interest debts as soon as you can.

Establish saving habits

The more you save, the better your chances of reaching a comfortable retirement. Here are a few ways you can beef up your savings:

  • Pay yourself first. Set up automatic transfers to move money into a savings account when you get your salary, so you won’t be tempted to spend it. If you can’t put aside a lot of money, you could start low (e.g. 1% of your income) and try to gradually increase it over time.
  • Cut down on unnecessary expenses. Consider if you can spend less money on expenses such as food delivery, entertainment or retail purchases.
  • Review subscriptions. List out all your recurring subscriptions – this could be your streaming TV subscription, mobile phone plan, internet bill or gym membership. Consider if you can switch to a more affordable alternative or go without it altogether.

Consider using the 60%-20%-20% formula to help you plan your monthly expenses, emergency savings and retirement funds. Let’s assume your monthly salary is RM10,000 – all of you need to do is to allocate RM6,000 for your expenses, RM2,000 for emergency savings and RM2,000 for investments.

Start investing

Finally, you’re ready to start investing.

But how do you start? How do you know which assets to invest in, or how much money you should invest in them? Here’s where your risk profile comes in handy. Your risk profile refers to how much investment risk you can handle. From there, you can estimate your ideal allocation – that is, how your portfolio is divided into different asset classes like equities or fixed income investments.

For example, an aggressive investor might have 90% of their portfolio in equities, which are high-risk investments. On the other hand, a conservative investor might have 85% of their portfolio in fixed income investments, which carry low risk. To estimate your risk profile and asset allocation, you can take this short quiz.

The next step is to decide which investments go into each asset class. You can do this by selecting individual stocks or bonds, but an easier way is to invest in unit trust funds. Unit trusts invest in a group of equities, fixed income investments or other assets, which makes it easy for you to instantly diversify your portfolio.

There are a few ways you can beef up your retirement savings with unit trusts:

  • By investing your EPF savings. Under the EPF Members Investment Scheme, you can invest part of your savings in Account 1 in approved unit trust funds for potentially higher returns.
  • Through PRS. The Private Retirement Scheme is a voluntary investment scheme to help you save for retirement. Under this scheme, you can invest in PRS-approved unit trust funds.
  • Through regular unit trusts. You can also invest in unit trust funds on your own through Principal.

Here’s how these three methods differ.

(Members Investment Scheme)
PRSUnit trust
Tax incentiveNoneUp to RM3,000 until year of assessment 2025None
Creditor-protected (i.e. cannot be seized for debt repayment)YesYesNo
Nomination of beneficiariesAvailableAvailable. Quicker release of assets of beneficiaries on death, i.e. within 18 business daysNot available. Unit trusts fall under Wills/Wasiat or Distribution Act. Lengthier distribution of assets to beneficiaries, 3-5 years or longer
Sales chargeUp to 3% through fund management institution

0% through Principal and EPF i-Invest
Up to 3%, or 0% through Employer Sponsored PlanUp to 6.5%
Annual management fee1.8%1.4%1.8%

Evaluate your plan

As you get closer to retirement, you’ll want to periodically evaluate your investment portfolio – for instance, at the end of every year. Here’s why:

  • Rebalance your Throughout the year, your asset allocation may change as the prices of different asset classes fluctuate. To rebalance your portfolio is to adjust it so that it reflects your ideal allocation again.
  • Adjust your risk level. As you grow older, your risk tolerance might decrease. You may need to adjust your portfolio to invest in more conservative investments.
  • Account for life changes. As the years go by, your life circumstances may change. Perhaps you’ll have more dependents, or your lifestyle has changed and you’ll now need more money for retirement. Reviewing your portfolio to account for these changes ensures that your plan is still aligned with your retirement goals.

Start planning for retirement with Principal

Preparing for your retirement can seem intimidating, but you can’t afford to put it off. On the upside, a bit of planning goes a long way. With Principal, retirement planning is easy. Principal has a range of investment solutions, whether you’re looking to invest your EPF savings, through PRS, regular unit trusts or if you’re looking for Shariah-compliant solutions.

Visit Principal to find out how to take control of your financial goals and increase your chances of a comfortable retirement.

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