When the retirement topic is raised, people always think that it is too early to plan for retirement. Most of the conversations pertaining to personal finance are normally related to how to increase income or how to reduce debts. You can see most Malaysians don’t seem to prioritize their retirement planning. It is never too early to plan. The earlier you plan, you can have more buffer for any correction on the plan. Anything can go wrong. If you fail to plan, you are planning to fail.
To start planning well for our retirement, we begin with the end in mind.
When we retire, there is no longer any active income coming in. Hence we need a huge retirement sum to fund our ongoing retirement yearly expenses. How much is the retirement sum required?
There are quite a number of information to derive the retirement sum. So, check this link out for the worksheet to help you to calculate the final retirement figure. These are the 4 elements that you need to fill up on the worksheet to get your final retirement sum.
- How long we have to reach our retirement age: Let say one starts to plan for retirement at the age of 30, you key in 30 as the current age. Then what will be the desired retirement age? Let say age 60. You will key in 60 as the desired retirement age. You shall see now the number of years to retirement is calculated automatically.
- Inflation rate and the investment rate of return: The published inflation rate is about 3%, however, you can use higher rate to capture for the higher retail inflation rate. The investment return is crucial. If you are saving, put in the fixed deposit rate. If you are investing, put in your investment rate of return. Once the 2 rates are entered, you will see the adjusted rate of return being calculated automatically. The adjusted rate of return is the net investment return after considering the inflation rate.
As you know, inflation is killing our wealth and the investment is growing our wealth. When having these 2 forces, we cannot use either one of it to compute the figure. We are adjusting it. If the adjusted figure is 3%, it means that our net investment return is 3% after considering the inflation, this net return will be used to fund the retirement yearly expenses since there is no more active income during the retirement period. The retirement sum is calculated using this formula: the yearly retirement expenses divide by the adjusted investment rate of return.
- Monthly retirement expenses: We will key in the expected monthly retirement expenses (without inflation). Exclude any loan commitment as by the time we retire, we shall have finished paying off the loans.
- Current saving / investment value: We will key in our saving / investment to calculate the gap between this figure and the retirement sum required. The next value that will be calculated automatically will be the monthly saving / investment required to fill the gap.
So, when you have the monthly figure ready, you need to ask yourself whether the monthly figure that you derive is possible to be achieved? If not, you might need to do some adjustments to your planning.
- The higher the inflation, the higher retirement fund is needed.
- The higher the investment rate of return, the lower the retirement fund is needed.
- The longer the years to retirement, the lower the monthly investment amount.
- The smaller the monthly expenses amount, the lower the monthly investment amount.
After understanding this, perhaps you know what to do. If the monthly investment amount looks big to you, you can choose to increase the investment rate of return by investing more aggressively. When you master the skill of investment, you can invest at a rate more than 6%. The other alternative will be to reduce your retirement expenses. If you can spend less, you need a smaller retirement sum. The last choice you have is postpone your retirement to a later stage. By postponing the retirement, you will have more time to prepare for the amount required, hence reducing the monthly investment amount. Hence, planning early is very important. If you start planning early, the monthly investment amount required will be much lesser than the one who starts planning 10 years later.
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