We’ve been writing about retirement planning for as long as we can remember but the number one question that our readers ask most often is, “How much is enough?” How much should you save for retirement? How much do you need in retirement? How much will you spend in retirement? How much can you afford in retirement? These “how-much” questions are all vital questions that will come up in everyone’s retirement planning process.
There are many theories and rules of thumb to answer all these questions, and they all work – depending on the retirement lifestyle that you have envisioned for yourself. Planning this out is essential to figuring out whether you will be able to retire or whether you’ll need to keep on working!
According to Datuk Steve Ong, chief executive officer of Private Pension Administrator (PPA), the rule of thumb is to ensure that one has two-thirds of the last drawn salary to maintain one’s lifestyle past the retirement age.
If your last drawn monthly salary is RM6,000, you will need about RM4,000 a month to enjoy the same quality of life in your retirement years.
Another way that gives you an idea of how much you will need for retirement is the multiply by 25 guideline. This rule estimates how much money you’ll need in retirement by multiplying your desired annual income by 25.
Why 25? This assumes a conservative figure of 4% returns on your retirement fund, so you withdraw 4% (1/25) each year while earning 4% as well to ensure your fund leaving your fund more or less unchanged so that it doesn’t deplete before your time is up.
This means, if you want a monthly retirement income of RM4,000 a month, you will need to withdraw RM48,000 a year from your retirement portfolio, which makes a total of RM1.2 million in your retirement portfolio (RM48,000 x 25 = RM1.2 million). If you want to withdraw RM60,000 per year (RM5,000 a month), you’ll need RM1.5 million.
Don’t let the amount scare you. All these guidelines are just guidelines. Ultimately, you need to decide what you want for your retirement to be able to determine how much you will need in your golden years accurately.
Here are 5 most common retirement lifestyles and how much the estimated costs are:
1. The minimalist retirement
Though it is always the safest to prepare financially for a retirement that matches your lifestyle pre-retirement, some retirees do opt for a minimalist retirement. Minimalist retirement involve downsizing on your lifestyle – for instance, moving to a smaller home assuming that your children have grown-up and moved out.
The key to planning a minimalist retirement is to list down all the things that you are currently paying for, and see which can be eliminated. Some of the lifestyle adjustments that you may be required to make are:
- Eating in instead of eating out
- Downsizing to a smaller home to keep maintenance and utilities fees low
- Changing to a smaller, more fuel-efficient car to keep petrol and maintenance low
- Cutting down significantly on entertainment costs (that expensive golf membership may have to go)
- Cutting down on vacations cost by going to nearer destinations, or limiting to once a year only
- Paying off all your loans and debts before retirement. This means no more housing and auto loan
Assuming that you will be debt-free by the time you hit retirement, here is the ballpark figures of how much you and our partner need for the necessities:
| Category | Annual estimated cost |
|---|---|
| Accommodation (inclusive of upkeep, utilities, etc.) | |
| Transportation (inclusive of petrol, servicing, repairs, etc.) | |
| Food & groceries | |
| Insurance for two persons (life and medical) | |
| Entertainment | |
| Vacation (once a year) | |
| Contingency fund | |
| Total estimated cost per year* | |
| Total retirement fund needed for 20 years |
* Annual cost does not include inflation.
If you can stick to a minimalist lifestyle, you will mostly need about RM3,000 a month for yourself and your partner in your golden years.
2. Starting a business
After working for decades, some retirees would consider exploring the idea of starting a business post-employment. Perhaps it’s out of passion, or to kill time, but for most, they need to supplement their retirement income due to poor retirement planning when they were in employment.
Whatever the reason, starting a business takes thought and planning. When considering what to do for a business, first determine how you can take your skills and turn them into a profit. For example, if you like baking, you can start a baking business from home.
At this stage of life, your risk appetite should be kept small. Capital for starting the business should not be eating into your retirement income. Remember, start small and start slow.
| Cost of starting a home-baking business | Estimated return | Risk |
|---|---|---|
| RM2,500 To buy materials, utensils and taking up a two-month baking course. | - RM30 per kg for cake - RM20 per box of cookies - RM4 per cupcake | Low |
If you are able to fulfil the following orders a month, here’s how much you can possible make every month:
| Item | Quantity | Amount |
|---|---|---|
| 1 kg cake | ||
| Cupcakes | ||
| Cookies | ||
| Total revenue a month | ||
Of course that’s barely enough to cover your monthly expenses but it’s a good way to supplement your retirement fund to keep up with your current standard of living or increase it if you’re able to.
3. Back to school retirement
Most people look forward to their golden years as a period where they would finally be able to fulfil their aspirations – be it to travel the world, or to go back to school.
However, the truth is, aspirations cost money. If you are planning to take up a course post-employment, you will have to ensure your retirement income be able to cover all of your expenses, plus the fees of going back to school.
Going by the rule of thumb used by the PPA, which is to achieve two-thirds of your last drawn income of RM6,000 a month, this will be a rough estimation of how much you need:
| Monthly retirement income | 2/3 x RM6,000 = RM4,000 a month |
| Annual retirement income | RM4,000 x 12 months = RM48,000 |
| Estimated years of retirement | 20 years |
| Master of Business Administration (MBA) at Universiti Malaya | RM29,727.90 |
| Total retirement funds needed | RM989,717.90 |
So you’d need to plan quite a bit ahead in order to afford that additional RM29,000. This will need to come in the form of additional savings before retirement or a general decrease in your cost of living post retirement. What’s important is that you never withdraw more than RM4,000 in order to keep your retirement funds secure.
4. Retiring abroad
According to the latest study release by HSBC, the preferred retirement destinations for Malaysian retirees are Australia, followed by New Zealand, Singapore and Switzerland.
Retiring abroad usually requires more money than retiring locally, especially if the exchange rate is against you. If you are like most Malaysians, your preferred destination would be Australia. According to Numbeo, estimated living cost in Australia is around AUD$30,000 a year, provided you retire at age of 60, lives up to age of 75 and have no medical complications.
Here’s how much you need to have before you jet off to your dream retirement in down under:
AUD$30,000 x 25 x 3.10* = RM2,324,232.85
* Based on exchange rate of December 2015
The above calculation has not taken inflation into account. Just looking at that will show you that you will need to have quite a substantial amount of money saved up!
Whichever retirement lifestyle you aspire, it is important that you plan for it as soon as you can. There are various ways to help you boost your savings to ensure your retirement fund can outlive you. One way to systematically save up enough to complement your Employees Provident Fund (EPF) savings is by investing in a savings plan that come with insurance protection.
Here’s how much someone aged 30 would need to save each year to fit the retirement lifestyles above:
RM712,000 | RM714,500 | RM989,717.90 | RM2,324,232.85 |
|
| Average annual rate of return | ||||
| Annual cost of living in retirement | With RM29,727.90 one time payment | |||
| Average yearly saving target |
One of the most popular and easiest way to manage your retirement planning is through a retirement savings plan that come with insurance protection. Here are some criteria that will have to consider when choosing the right retirement savings plan to protect your golden eggs.
- Flexibility – The retirement savings plan should offer you flexibility in premium payment and also in pay-out.
- Fast-track – The premium you paid can be reinvested and left to be compounded until maturity of the policy. Other than just the guaranteed cash payment, opt for a savings plan that provides an enhanced investment option. Though not guaranteed, the enhanced retirement benefit will help boost your retirement savings.
- Protection – The policy should also keep you protected until maturity. The higher the age of maturity the better, as you wouldn’t want yourself to outlive your retirement fund.
- Security – Get a savings plan that offer guaranteed payment that you can choose to cash out before retirement or maturity, or reinvest as deferred retirement benefit.
No matter your age, or stage of life, don’t ignore the white elephant in the room. Retirement is an eventuality, and planning for it will only get harder, due to the rising inflation and cost of living. Grab it by its horn and face the issue as soon as you can. Don’t leave it till the eleventh hour!
