The 2 magic numbers to retire comfortably
To retire comfortably, you need a savings plan and to add to your EPF savings.
Retirement is a destination each one of us will get to sooner or later. It is quite impossible to fix a retirement amount because each of us will get there at a different time, therefore it will be a different value of money with varying needs of retirement.
However as a guide, here are two numbers that are easy to remember that will help you achieve your retirement goals with almost 100% certainty.
The first magic number: 30%
It is about how much you should save, which is 30% of the money you make. How much you make determines the lifestyle you can enjoy.
Regardless if you are making RM1,000 a month, RM5,000 a month or RM10,000 a month, if you can save 30% of your money by spending below your means at all times, you will be able to retire and maintain your lifestyle.
Why 30%?
If you are actively employed, you already save about 20% in EPF by combining both your personal and your employer’s contribution.
Unfortunately, according to the 2016 EPF report, only 22% of the 6.7 million active contributors aged 54 years have sufficient savings of RM196,800 or more to sustain themselves during retirement.
If you are not one of the top 20% high-income earners, you will most likely end up without a sufficient retirement nest egg if EPF is your only means of savings.
To do better, you need to save at least 10% more on your own. For those of you who don’t contribute to EPF, you best aim for at least a 30% saving rate.
The essential principle here is not about the amount of savings, but the habit of being able to delay gratification, live frugally and not to spend your future money.
Once you have learned to live for less and lead a simple lifestyle, you will realise how rich you can be as you have more choices than those who can only accept second best.
For instance, if you are used to living large during your vacation, you might not enjoy as much when you stay in a hotel with less than a five star rating.
But if your tolerance is high, you have a vast range of accommodation choices, and it doesn’t affect your level of enjoyment even if you stay at cheaper places.
So the first number is a 30% saving rate. If you adhere to that, you will have a fine retirement.
However, if you want to retire comfortably and live a good lifestyle, you will need the second number.
The second magic number: 10%
This is about investment returns. You need to know how to invest with a double-digit return, 10% or more, whether in properties, stocks or businesses. The earlier you know how to do this, the earlier you will have a much better chance to retire.
For example, if you have RM1 million now, and you only generate a 3% return like in fixed deposit, that’s just RM2,500/month. But if you can achieve 12%, that’s RM10,000 a month. RM2,500 versus RM10,000 is a big leap.
The standard advice from financial advisers is to stay conservative with your retirement fund and keep it in stable investments like fixed income funds, bond funds, EPF and Amanah Saham.
There is a flaw in this common advice because even retirees are investing for the long term. They might need to spend three to five percent of their net worth in the next 12 months, and that can be kept in stable funds.
But how about the rest? Retirees do hope that their money lasts as long as possible. So the investment horizon is also long term.
This article first appeared in kclau.com
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KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled Money Automation System course. He also co-founded many other online financial courses including Bursa Method, Property Method, Founder Method and REIT Method.