Why should you start planning for retirement early?

The earlier you start planning, the easier it is to reach your retirement goals – that’s thanks to the power of compounding. With compounding, not only are you earning investment returns from the money you’ve initially invested, you’re also earning returns on all the returns you’ve previously received. This leads to exponential growth over time. 

So the earlier you start, the more time you’ll give your money to grow – and the less you’ll have to invest to reach your target. For example, here’s how much you’ll have to invest every month to reach RM1 million by the time you’re 60.

How much do you have to invest to get RM1 million, assuming an annual return of 7%?

In the example below, a 25-year-old would need to invest RM584 a month to get to a million by 60. But if they delay by ten years, they would need to invest RM1,277 a month to catch up!

Age you start investing253545
Monthly investmentRM584RM1,277RM3,214
Total investmentRM245,411RM383,121RM578,583
Investment returnsRM754,589RM616,879RM421,417

How to plan for retirement

So how do you start planning? Here are four steps that can help.

1. Find out how much you need

These factors will affect how much you’ll need:

  • Your retirement age. The earlier you retire, the more you’ll need. This is to account for fewer years of income and a longer period of retirement. 
  • Your future expenses. How do you want to spend your retirement? If you want to indulge in expensive hobbies, international travel or spoiling your grandchildren, you’ll need to account for those expenses too.
  • The effect of inflation. Over time, inflation causes the prices of goods and services to rise. For example, assuming an annual inflation of 3%, someone who retires thirty years in the future would need RM2.4 million to afford the same goods and services RM1 million could get you today.

Knowing how much you need helps you work backwards to figure out how much you’ll need to save every month. It also helps you estimate if you’re on track to meet your retirement goal.

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2. Pay down debt

Before you start investing for retirement, consider paying off any high-interest debt, such as credit card debt or personal loans. That’s because these debts can cost you more in interest payments than you’ll earn by investing. For example, credit card interest rates can go up to 18% p.a.! It’s unlikely that you’d be able to invest in a way that can consistently beat these rates.

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3. Invest every month

To decide how much to invest every month, you could work backwards from your target retirement savings – an online investment calculator can help you with this. For example, if you have a savings target of RM2 million and you plan to retire in 40 years, assuming an annual return of 7%, you’d need to invest RM809 a month.

But how do you start investing? Besides contributing to your Employees Provident Fund (EPF) and Private Retirement Scheme (PRS) accounts, you can also consider these beginner-friendly options: 

  • Unit trusts. Unit trusts are like baskets of assets (such as stocks, bonds or precious metals) that are usually actively managed by professional fund managers. They’re beginner friendly as you’d get to spread your money across many different investments at once, reducing your risk of choosing a poorly performing investment.
  • Exchange traded funds (ETFs). ETFs are like unit trusts, except that they are traded on the stock market and are typically passively managed. They usually have lower fees than unit trusts. 
  • Robo advisors. If you’re not sure of where to start at all, robo advisor platforms can help you tailor an investment plan to suit your financial goals. They typically help you invest in unit trusts and ETFs.

4. Review portfolio periodically

Take some time to review your portfolio periodically – perhaps once every six months or once a year. This helps you know if you are on track to meeting your retirement goal, or if you need to increase your savings. 

As you get closer to retirement, you’ll also need to shift your portfolio from high-risk investments to lower-risk investments. 

How EPF and PRS can help you save for retirement

There are two schemes that can help you get better prepared for retirement: the Employees Provident Fund (EPF) and Private Retirement Scheme (PRS)

a) EPF

If you happen to be an employee, you may already be contributing to your EPF account. But if you want to increase your retirement savings, you can make additional contributions. You can even contribute to EPF if you are self-employed or don’t earn a regular income.

b) PRS

The PRS is a voluntary investment scheme. Under PRS, you can invest in approved unit trust funds that are managed by PRS providers like Public Mutual, Kenanga, Principal and others.

The great thing about PRS is you can claim tax relief of up to RM3,000 when you invest in PRS until 2025. Depending on your income bracket, that could mean tax savings of up to RM900! 

What if you don't have enough to retire?

If you’re close to retirement (or in the middle of it) but don’t have enough savings, here are a couple of things you can do.

  • Retire later or work part time. Delaying retirement for a few years can certainly help you grow your savings. Alternatively, taking up part time work when you retire –  such as consulting, administrative work or tutoring – can also help cover living expenses. But continuing to work after retirement may not be easy, so you may need to plan in advance
  • Increase your income streams. The more you earn, the more you can put aside for retirement. Perhaps this means renting out a spare room, taking a second job or investing in low-risk, income generating assets like bonds.
  • Increase savings rate. Consider if you can cut down on expenses. For example, downsize to a smaller home, switch to a cheaper mobile plan, reevaluate your insurance spending or be mindful of your energy usage. This may not increase your savings, but it will certainly help it last longer.
  • Know what financial aid you’re eligible for. Depending on your age and income bracket, you may be eligible for government financial assistance. Your state government may also offer financial aid – for example, the Selangor state government offers eligible seniors an annual RM100 voucher for groceries
  • Talk to a financial planner. If you’re not sure what to do, or where you stand financially, a financial planner can assess your financial situation and guide you through the necessary steps to get ready for retirement.