Why you can’t live off a million ringgit forever

The concept of becoming a millionaire resonates with most people. It is literally a dream come true where you can enjoy a comfortable life without working anymore.

The question is can you really live off of a million ringgit forever even if you don’t work another day?

If you don’t generate any other source of income, a million ringgit can last you about 50 years if you spend RM1,000 per month, nowhere close enough to living the dream life.

As it turns out however, investing the million ringgit to generate even an average return can be enough to help you splurge thousands of ringgit every month for the rest of your life.

Assuming you’ve already made your major life purchases like a home, properly investing RM1 million can help you easily afford a RM2,000-RM4,000 monthly expenditure for 50 years, in terms of today’s ringgit.

Barring any major life events that require a huge lump sum expense, this should be able to let anyone with a million ringgit retire sometime in their 30’s or 40’s.

The ‘run-to-zero’ strategy

To answer the million-dollar question, we use a method called the “run-to-zero” strategy. This means that we calculate the monthly expenditure required to completely use up the million ringgit based on 2% annual inflation and certain rates of investment return.

For example, if we have a monthly budget of RM1,634, we would set aside RM19,608 to spend in the first year and invest the remaining balance of RM980,392.

If we were to make a return of 2% on this balance, we would be left with RM1,000,000 at the beginning of the second year.

Then, we set aside RM20,000 to spend in the second year (up 2% due to inflation) and invest the rest again. Adjusting our expenditure for inflation ensures that a person is able to maintain his quality of life over a long span of time.

This example is a useful demonstration of the power of investing. While not investing the million would allow a person to spend only about RM1,000 per month for 50 years, merely generating 3-7% of annual return helps increase this budget to RM2,000 to RM4,000. This is because of a concept called compounding returns.

Compounding returns

Investing allows your money to earn more money for you, resulting in an exponential growth where each ringgit you invest generates additional returns in the future.

Therefore, making even a single-digit return on your cash can snowball, giving you a larger budget spread out over a long period of time.

Building a well-diversified portfolio filled with well-researched investments should produce around 5% profit per year on a consistent basis.

In general, we recommend mixing your investments with some high-risk/high-return investments like stocks with less risky alternatives like bonds.

Contrary to popular belief, as long as you do your homework and pick your investments carefully, making 3-7% on your money is not as difficult as you may think.

Everyone wishes to be a millionaire but not everyone can. However, the important lesson here is that putting your money to work and generating some returns can make a huge difference in your savings and retirement planning.

Earning even a meagre 3-5% can increase your wealth dramatically compared to letting inflation just eat away at your savings over time.

Most importantly, it’s advisable to start an investment portfolio early in your life so that you can let time and compounding interest do most of the heavy work for you.

This article first appeared in thenewsavvy.com

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