Well, here is one on personal finance.
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A friend of mine asked me how much should he
start investing in order for him to retire comfortable at the age of 55? Apart
from the EPF he is already contributing, he would like to have an alternate
investment that could supplement his retirement lifestyle and at the same time
ensuring that his next of kin would be able to inherit additional cash when he
passes on.
From our conversation, he has agreed to share
his personal details in my blog and wants to be known only as Friend X to the
readers.
Now let's begin with the basic information of
this friend of mine:
Name : Friend X
Age : 35 years old
Expected Retirement Age : 55 years old
Yearly Drawn Salary : RM72,000
Expected Yearly Expenses After Retirement :
RM60,000 (based on current lifestyle)
Inflation Rate : 5% per year
Initial Investment Amount : RM3,000
Investment Objective : How much should
Friend X invest monthly starting from now in order to meet his expected yearly
expenses after retirement?
Expected Yearly Expenses After Retirement
Firstly is to calculate the projected Expected
Yearly Expenses After Retirement (factoring in inflation rate of 5% year) when
Friend X arrives at the age of 55.
Based on calculation, Friend X's expected
yearly living expenses would be approximately RM159,200.
We both agreed that when he turns 55, he would
like all his investment to be moved to low risk investment such as Fixed Income
Funds which would generate about 6% in returns annually. With that, we are
able to calculate the amount of retirement investment needed in order to
generate RM159,200 annually worth of returns based on 6% annual return upon
investment.
Amount of Retirement Investment Needed
We both agreed that when he turns 55, he would
like all his investment to be moved to low risk investment such as Fixed Income
Funds which would generate about 6% in returns annually. With that, we are
able to calculate the amount of retirement investment needed in order to
generate RM159,200 annually worth of returns based on 6% annual return upon investment.
Amount of Retirement Investment Needed =
(RM159,200 / 6%) x 100% =RM2,653,333
Do take note that Friend X wishes to retire
with no worries about money. Therefore his choice as mentioned above is to
save/invest as much as possible now in order for him to reap the benefits by
living on the interest/divident/annual returns when he retire.
Our next calculation is to find out how much
Friend X needs to invest on a monthly basis to achieve his target retirement
investment value of RM2,653,333. We both agreed that he is willing to take the
risk by investing into equity funds which on the average tend to deliver about
10-15% per annum returns. The returns are also reinvested back into the fund as
Friend X does not need that money since he is still earning a fixed salary job.
Calculating Monthly Contribution to Investment
Target Retirement Investment Value
: RM2,653,333
Average Investment Return : 12% per annum
Initial Investment Amount : RM3,000
Investment Period : 20 years
With the information above, we are able to
determine how much should Friend X monthly contribution towards investment as
shown below:
Monthly contribution for Friend X into
investment is calculated to be RM2,660 / month.
Summary
Although the monthly contribution for Friend X
seems to be a huge amount, my advice to him is to invest as much as he could
possible afford to first. The target for him is to allocate at least 30% of his
salary for investment and apart from that, to invest additional amount whenever
he obtains his annual bonus.
Although Friend X might not be able to meet
the monthly contribution calculated, he has made the right choice by starting
now and planning for his retirement 20 years down the road. As the saying goes,
the early bird, get the juiciest among all worms. It's never too late or too
old to start investing for your future. Do it not only for yourself but for
your family.
Would you like me to calculate your retirement
investment? Then drop me an email at sickfreak03@gmail.com
Cheers and happy investing everyone!
His blog can be read at http://invest-made-easy.blogspot.com/
12 comments:
At the current inflation rate, no one will get to retire at 55 more like 70!!
To calculate for the inflation rate I use a simple formula whereby the current amount is multiplied with (1 + inflation rate%) to the power of the number of years you wish to calculate. Say current amount is RM10,000 and inflation rate is 5% while the number of years is 20.
Then the formula would look like this:
10,000 X (1+0.05)power of 20
For the monthly calculation, you can get that from my Investment Calculator section.
felicity, good and very useful post for many people. I doubt many people have looked into their retirement planning which is very crucial for their well being after retirement. I got a couple of comments here. First your friend X would find his standard of living deteriotes year after year after his retirement because your calculation has not included inflation, after X's retirement. Secondly your lump sum requirement is based on perpetual annual withdrawal, which results a bigger amount required as opposed to if you assume X dies at the age say 75. These two factors may balance each other somewhat, but not quite. Actually I feel that doing this type of calculation using real number in terms of expenses required and real return, ie after adjusting for inflation, as opposed to nominal values, would be a more meaningful one.
Another comment here. If readers here follow this Matt fellow here and punt on forex, they will never have enough money for retirement, maybe with mountain of debts.
How to file a compliant against this MATT?
Really sick of this type of advertising.
Hi KC
I think there is a 5% inflation target there. I guess the annual withdrawal will only start once that someone retire. hence the 6% return should be able to cover the spending need.
However, I am just wondering how is a person with RM72k income able to save RM2660 a month after tax etc.
EPF is earning the person max 6+% on a good year. I agree that it is a challenge for an ordinary person to save enough for retirement, buut I guess this is the guide and benchmark. I have seen too many who just gave up as they do not save enough from their 30s or even earlier. Should not be the case. Building the war chest for retirement should be on everyone's mind unless that someone already have very strong inheritance.
Err fixed income fund return of 6% and equity consistent 12% is stretching it a bit. Even WB is only compounding at less than 20%.
Conservatively one would be better to use 4% for fixed income and 8% for equity. These are based on long term average figures.
This means Mr. X needs to invest more and consume less...
this is indeed a guideline towards retirement. if we can come close to that figure, that's fantastic, if we can't at least there is a certain amount accumulated by then + epf(if we contribute) regularly.
p.s : who is this Matt guy?.?
It is indeed very difficult to save enough money for retirement. When one is young, he doesn't earn much. When he is in his thirties and forties during which he earns more, he probably has a family to care of, plus installments for cars and house. In fact his spouse would have to work to contribute to household expenses. Otherwise it would be tougher. When he is in his fifties, he still have to pay for car and house installment plus quite some money required for children's education, especially if he is thinking of providing them with better education overseas. Yeah unless he has some inheritance, or marry a billionaire's daughter, it may not be an easy task to achieve financial freedom at the age of 55 and be able to retire. Achieving 12% in equity investment? It is not easy too unless he is a savvy investor. Otherwise the costs of investing in a unit trust would eat away at least a third of the normal long-term return of the market. Invest himself? The costs could be even higher if he has no knowledge in investment, some one following others to buy Patimas.
In my opinion, not all hope is lost. If Mr. X insists on having an annual expenditure of RM159,200 p.a. upon retirement, ceteris paribus, the plan could be modified as follows:
First, in order for Mr. X to enjoy RM159,200 p.a.indefinitely upon retirement, an investment mix of 40% equity + 60% bond of about 8% p.a. would be recommended instead. Therefore:
Amount of Retirement Investment Needed = (RM159,200 / 8%) x 100% =RM1,990,000
Revised Plan:
Target Retirement Investment Value : RM1,990,000
Average Investment Return : 12% per annum
Initial Investment Amount : RM18,000 (20% of his current annual salary)
Investment Period : 21 years
Now, as somoene aptly pointed out - is 12% yoy really achievable? IMHO, 12% investment return p.a. is not too far-fetched, although it does take quite some effort and discipline to manage the investment portfolio and buying only investment-grade stocks. Here are some examples (investment-grade stocks with consistent dividends) without delving into too much detail:
1. NESTLE : Full-history price appreciation (1989 - 2011) = 8.8% yoy + average 10Y dividend yield = 4.8%
2. DIGI : Full-history price appreciation (1997 - 2011) = 21.2% yoy + average 6Y dividend yield = 7.4%
3. DLADY : Full-history price appreciation (1968 - 2011) = 12.3% yoy + average 10Y dividend yield = 7%
Assuming Mr. X's salary increases by 4% yoy, and he invests as much as 25% of his annual income every single year into his portfolio with 80% equity (12% return yoy) and 20% bonds (4% return yoy), he would have amassed as much as RM1.83mil by the time he reaches 55yo, which may still be short of the RM1.99mil target, but not too far off.
Illustration : https://dl.dropbox.com/u/72612763/mrx.png
One may argue if it is possible for someone to save/invest 25% of his/her income. But for Mr. X to reach his goal, he either has to commit to this, or something's gotta give. Eg. he could instead increase his exposure to equities, start with a higher amount etc etc etc.
Hi David,
Interesting info. Could you kindly share the spreadsheet with us so that we also can calculate our own numbers? Thank you!
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