It can be a dream come true to be on the road to financial independence in your golden years, but it can also turn into an anxiety-inducing nightmare if you fail to reach the expectations you set out when you started drawing up your personal money management program.

retirement sunset couple

Even if you believe you have set away a significant amount of your assets for retirement, if you have not factored in changes such as the cost of living or inflation, it may still be insufficient. So, do you have enough money set aside for retirement?

The Employees Provident Fund (EPF) increased the minimum savings objective to RM228,000 by 55 years old last year. This equates to a monthly retirement income of only RM950 (assuming a life expectancy of 75 years old).

The general guideline for personal finance in Malaysia is to begin planning for your retirement as soon as you have a steady income since the sooner you begin, the more money you might have by the time you reach 55.

Could your retirement savings be sufficient to cover your deficiencies, even if you have set them in motion? The standard rule of thumb for budgeting to save is to set aside 20% of your salary, but this is insufficient when it comes to saving for retirement.

While you can’t anticipate the exact economic situation in the future, you can forecast several things to have a good idea of how much money you might need to live your life.

The Living Wage in Malaysia

A minimum acceptable quality of living goes beyond being able to purchase basic requirements like food, clothing, and shelter. The ability to meaningfully participate in society, the opportunity for personal and family growth, and the absence of significant financial stress should all be part of this level of life. It should, however, represent needs rather than wants. It excludes the cost of living, which is the money spent to satisfy aspirations for a higher standard of living.

In Malaysia, the bottom 40% of households saw a significant gain in an average monthly income of 6% per year between 2014 and 2016. However, because of the low starting point, even a 6% gain did not amount to much. In absolute terms, this group’s monthly income increased from RM2,537 to RM2,848, a minor rise of roughly RM150 per year when compared to other income categories.

After adjusting for inflation, households in the bottom 40% of the income distribution saw a 3.8 percent increase in real income. For some households, particularly those with new dependents, a minor increase in income may be sufficient to keep up with price increases in basic requirements, but it falls short of meeting a minimum acceptable quality of life.

As Malaysia advances closer to being a high-income country, it is necessary to set a goal for all residents to achieve a minimum acceptable quality of life. Providing a living wage can be a start in the right direction.

International experiences demonstrate that using the living wage as a benchmark to examine the adequacy of present salaries and social assistance can inform, question, and develop policies aimed at establishing a minimum acceptable living standard. As a result, calculating a representative living wage level necessitates a great deal of thought.

Inflation and Its Effects

Inflation is the loss of a currency’s purchasing power as a result of rising prices across the economy.

When one’s purchasing power is dwindling, it might be natural to want to buy now rather than later. Cash depreciates, therefore it’s preferable to get your buying done and stock up on items that are unlikely to depreciate. For consumers, this means filling gas tanks, refilling the refrigerator, buying shoes in the next size up for the kids, and so on. It requires businesses to make capital investments that might otherwise be postponed under different circumstances. Many investors flock to gold and other precious metals when inflation strikes, but the volatility of these assets can undermine the benefits of their price protection, particularly in the near term.

Wanting to spend and invest in the face of inflation tends to raise inflation, creating a potentially fatal feedback loop. People and businesses are spending faster to limit the amount of time they hold their deteriorating money, resulting in an abundance of cash that no one wants. In other words, when money supply exceeds demand, the price of money—the purchasing power of currency—falls at a growing rate. When things become really bad, the sensible practise of stocking up on business and household supplies rather than sitting on cash devolves into hoarding, resulting in empty grocery store shelves. People grow frantic to get rid of their money, so every payday becomes a frenzy of spending on anything that isn’t becoming increasingly worthless.

Central banks can try to control things by boosting interest rates. Monthly repayments for bank loans might suddenly appear to be extravagant. When there isn’t as much money flowing around, it becomes scarce. Although central banks generally do not want money to grow more valuable, they are averse to full deflation nearly as much as hyperinflation. Rather, they yank on interest rates in either direction in order to try to keep inflation close to the desired level (generally 2 percent in developed economies and 3 percent to 4 percent in emerging ones).

Identify Retirement Lifestyle Costs

According to the EPF, you’ll need to save at least RM240,000 by the time you retire at 55 years old to cover your basic needs, such as food and everyday costs. When you retire with RM240,000, you’ll have RM1,000 every month to live on. This savings plan is based on an RM1,000 minimum pension for public sector employees and assumes you retire at 55 and live to be 75 years old, which is the Malaysian average life expectancy. However, because the suggested savings amount is based on expenditures for basic needs, RM1,000 may not be sufficient for a comfortable retirement.

You may need to spend money on medical expenditures, your family, and leisure to enjoy a good retirement. So, depending on your situation, Bank Negara Malaysia estimates that you might need the following amount of money every month:

  • For a single adult: RM2,700.
  • For a couple without a child: RM4,500.
  • For a couple with two children: RM6,500.

An estimate is that by the age of 55, you may need at least RM578,000 in savings (if you’re a single retiree) to pay RM2,700 in monthly expenses, based on Bank Negara’s suggestion. (Assuming a 5% annual return from the EPF and a 2% annual inflation rate.)

The basic guideline is that you may need two-thirds of your final drawn income to sustain your pre-retirement standard of living. If you make RM7,500 per month in your final year of work, expect to need RM5,000 per month when you retire, otherwise, you might have to downgrade your lifestyle. According to the EPF’s Belanjawanku expenditure guidance, an elderly couple in the Klang Valley was estimated to have required RM3,090 per month to maintain a “decent level of life” in 2019.

Investments for Retirement

Some investors favor dividend-paying companies because they provide a regular stream of income. While the stock market has traditionally produced excellent average returns, it has not always followed a straight and predictable upward path. Some stock investors prefer to lock in their earnings as quickly as possible. Dividend investing tries to establish a portfolio of stocks that pay out significant dividends regularly. Dividend-paying companies give you a regular share of their profits in the form of monthly, quarterly, or yearly payments. Dividends can be paid in cash or more equity. Dividends aren’t guaranteed, but they’re usually paid over a long period because missing dividend payments can be construed as a symptom of a company’s financial distress.

Real estate, like dividends, is frequently looked at as a way to generate stable income regardless of market conditions. While real estate can be used to save for retirement, keep in mind that it is not suitable for everyone. While renting can provide consistent cash flow, you must also pay for the upkeep of your investment properties. That implies you’ll need enough money from rent to cover your mortgage, as well as any damages or repairs. Hiring a management business can help you avoid some of the more difficult aspects of real estate investing, but expect it to lower your overall returns.

When it comes to investing for retirement, asset allocation is a strategy that helps you decide how much money to put in stocks, bonds, and cash. Simply described, asset allocation is the process of balancing these three primary asset types. If you don’t mind being a little more hands-on but still want to try and keep things simple, use a simple asset allocation model to save for retirement. It’s simple to invest and save for retirement with a two- or three-fund portfolio based on mutual funds and exchange-traded funds (ETFs).

Conclusion

Making the correct decisions for the financial health of your retirement can be daunting, and its effects unknown until later on in life. You can alleviate and reduce some of the complexity of planning your retirement by following the guidelines stated in this article or referring to your financial planner for a more comprehensive plan.

 

Has this article helped you in preparing for your retirement? Let us know in the comments down below.