How many of us here dream of retirement? I know I am. But my biggest concern when it comes to retirement is, HOW MUCH DO I NEED? AND HOW MUCH SHOULD I BE SAVING EACH MONTH?
It’s said that the average Malaysian will need at least RM1 million to retire. But at the rate that inflation is rising and our purchasing power falling, that number seems a little too small.
Hence, it’s crucial to know exactly how much we need for retirement so that we can start saving for it now and won’t be forced back into the workforce during our golden age.
This is why, here at Mr Money TV, we’ve developed a simple Retirement Calculator where you’ll get to calculate all that and more!
So, here’s a guide on how to use our Retirement Calculator.
Step #1 To Calculate Your Retirement
Fill in the Data Entry section (refer below, all the green boxes) according to your current situation and what you see fit for your retirement.
In our example, we’ve put our current age at 30, expecting to retire by 60 and life expectancy by 80 years old. Our current monthly gross income is RM6,000 with an increment of 5%.
As for expenses, we’re expecting to spend RM7,000/month during retirement. On top of that, currently, in EPF, we have RM35,000; in savings we have RM15,000 growing at a rate of 4% p.a.; in investments we have RM20,000 growing at a rate of 8% p.a.
We’ve also assumed that inflation will rise at 3% every year for both pre-retirement and post-retirement.
As for Investment Return, pre-retirement, we’re expecting to get returns at 8% p.a. meanwhile post-retirement, we’re expecting the returns to fall to 5% p.a. as we become more conservative with our investments as we grow closer to retirement. On the other hand, we’re expecting EPF to provide returns of 5% p.a.
Finally, for the Replacement Ratio, estimate how much (in percentage) you will need during your retirement from your last salary. So for example, we expect to need 70% of our last salary before retirement to sustain ourselves once we stop working.
Step #2 To Calculate Your Retirement
You don’t have to do anything for Step 2!
Leave it to our Retirement Calculator to automatically calculate for you how much you’ll need for retirement and more importantly, how much you should be saving or investing each month to reach your retirement goals.
There are two ways Mr Money's Retirement Calculate will calculate this, either through the Fixed Method or the Replacement Method.
Fixed Method Auto-Calculation
Firstly, let’s take a look at the EPF Calculation section (refer below). Based on the auto-calculation, we can see that by the time we retire, we would’ve accumulated RM2,391,762.91.
Then if we look at the Fixed Method section (refer below), we can see that we will need RM3,417,813.50 to retire comfortably by 60; meaning we have a shortfall of RM1,026,050.59 after deducting our EPF savings. This additional RM1 million will have to come from our own savings and investment.
But before that, let’s better understand the Fixed Method auto-calculation (refer below). Earlier, we estimated that we will need RM7,000/month during retirement; now, if we look at our estimated expenses at retirement age, this means we would need RM16,990.84/month valued in today’s money to ensure we will still have the same spending power in the future.
Now, since we know that we will need to save and/or invest another RM1 million to secure our retirement, let’s take a look at the Savings And Retirement Section (refer below) of the calculator. Based on what we’ve saved and invested so far, by the time we retire, we would’ve accumulated RM249,904.10. However, this means we would still have a shortfall of RM776,146.49.
Therefore, in order to achieve our retirement goal of RMRM3,471,813.50, according to the Fixed Method (refer below), we will need to invest RM570.95/month with returns of 8% p.a. from now until we turn 60 years old to secure a comfortable retirement.
Replacement Method
Remember earlier when you filled up your Replacement Ratio? This is where that ratio (%) will come into play.
Let’s start from the top (refer below). Based on the 5% income increment we expect to achieve every year, our last salary before retirement would be RM25,931.65/month. And since we will need 70% (replacement ratio) of that for our retirement, this means we would have a retirement income of RM18,152.16/month in today’s value. Of course, if you think this is too much, you can always readjust your Replacement Ratio under the Assumption Section.
Now, if we take a look at the capital needed for retirement (refer below), we will need RM3,651,420.44; meaning we have a shortfall of RM1,259,657.53 after deducting our EPF savings. Similar to the Fixed Method, this additional RM1 million will have to come from our own savings and investments.
Once again, our accumulated savings and investment (refer below) would account for RM249,904.10 by the time we retire. This means we would have a shortfall of RM1,009,753.43 where we will have to invest or save more to make up for it.
Therefore, in order to retire by 60 years old with a total capital of RM3,651,420.44, according to the Replacement Method (refer below), we will need to invest RM742.79/month into an investment that will generate 8% p.a. returns.
If you're still unsure about how Step #2 works, you can also check out this video we made explaining it with a real-life example!
Step #3 To Calculate Your Retirement
Now that you know how much you need during retirement, the only thing left to do is to save up or more likely, invest towards it.
A good place to start would be the stock market, specifically the S&P 500 where returns average at 9.73% p.a.
If you’re interested in investing in US stocks, check out Maybank Trading Platform. For more information, click here.
BTW, planning for retirement is one thing but another really important aspect of obtaining financial freedom is to plan for the unexpected. Think of it as having a safety cushion for rainy days. And one of the best ways you can do this is by ensuring that you are well-protected by an insurance policy that serves you. If you’re curious as to whether or not you’re being “sold on” by your insurance agent, come join our webinar where we will provide an in-depth, step-by-step guide on how you can get the most out of your insurance with a budget. Click here to find out more.
