After decades of working, your retirement should be a time of leisure. Or at least, a time where you should not have to keep working to cover your costs of living.
But for many Malaysians, this isn’t the case. Statistics show that two out of three Employees Provident Fund (EPF) members aged 54 have less than RM50,000 in retirement savings. This puts them at risk of living below the poverty line.
That’s why it’s important to plan for retirement – whether you’ve just started working or have been in the workforce for decades. With some preplanning, you can increase your chances of a comfortable retirement. Here’s how.
Start as early as you can
The earlier you start investing for retirement, the easier it is to reach your retirement goals. That’s because of the magic of compounding returns. That is, when you invest, you may receive earnings – and if you reinvest those earnings, you will receive earnings on them too. Over many years, these earnings can grow to be greater than your original investment.
For example, here’s the difference if you start saving at different ages:
|
How much can your savings grow if you invest RM500 a month, at 7% p.a.? | |||
|---|---|---|---|
|
Age you start investing |
25 |
35 |
45 |
|
Retirement savings at the age of 60 |
RM893,481 |
RM412,059 |
RM167,328 |
|
Total investment returns earned |
RM683,481 |
RM262,059 |
RM77,328 |
In the example above, the investor who started investing at 25 earned RM683,481 in investment returns. But starting at age 35 could mean only earning RM262,059 - that’s a difference of over RM420,000 when you start ten years later!
If you delay saving for retirement, not only will you lose out on compounding returns, but you’ll also have to save a larger proportion of your income in the future to catch up.
Figure out how much you need
Before you start saving for retirement, you’ll need to figure out how much you need to save. This means estimating how much you’ll need every month in retirement. As a starting reference point, last year the EPF suggested that an elderly couple living in the Klang Valley would need at least RM3,090 a month to achieve a reasonable standard of living.
However, your actual figure will depend on:
- Retirement age.
The earlier you plan to retire, the more you’ll have to save and invest. Some people who achieved early retirement in their 30s and 40s do it by investing a big portion of their income while they’re still working. - Lifestyle.
Do you want a more lavish lifestyle or are you okay with a barebones budget? If you want to enjoy luxuries like overseas travel or eating at nice places, make sure to include that in your estimation. - Inflation.
Thanks to inflation, the prices of goods and services will increase over time. For example, if there’s an inflation rate of 3% every year, what costs RM1,000 today could cost RM2,427 three decades in the future. So, if you have a long way to go until you retire, you’ll need to account for inflation in your estimation.
Decide how much to invest
Investing is key to reaching your retirement goals. But first, make sure you’ve saved up for an emergency fund. This gives you a financial buffer, so you won’t have to withdraw from your investments if an emergency expense arises. If you have any high-interest debts, you should also prioritise paying that off first too, as they can drain your savings faster than you can grow your wealth through investing.
Once that is taken care of, you can work backwards from your savings target to decide how much to invest every month. Here’s where the Maybank Financial Goal Simulator makes it easy to calculate your monthly investment target.
Just provide your retirement age, estimated monthly expense, how long your savings should last and your initial investment. The simulator will calculate your investment goal target, and how much you should invest every month to reach your goal.
Review your asset allocation
Younger investors have a longer time for their investments to recover if a recession causes their portfolio value to fall. But older investors don’t have that luxury. So, as you get closer to retirement, you’ll need to gradually shift your portfolio towards low-risk investments. This helps protect your portfolio so you can withdraw your investments when you retire.
You can do this once every year. Compare your current allocation against your target allocation, and figure out how you’ll need to invest to reach your target.
Start planning today
For some of us, retirement can be decades away. But it’s best not to put it off for later – it’s much easier to reach your retirement goals if you start now. With the Maybank Financial Goal Simulator, calculating your retirement needs and monthly investment amount is a breeze.