Probably the most important step in retirement planning – is your retirement fund sufficient for the lifestyle you have in mind? This is the first thing you have to do before you even start any pre-planning. Remember that everyone has a different figure because there will be different lifestyles, desires, expectations, etc. – so use the below steps to calculate the retirement fund you need.
Based on my research, certified financial planners typically use a structured framework to help clients figure out their retirement needs. You can always consult a certified financial planner to assist you. Below is information and research I have done for my own reference. Remember that this is not professional advice, and always seek help from a professional for all finance related matters.
Steps to Determine the Retirement Fund Figure
Determine The Retirement Goals
- Current Age: Nothing to explain here. 🙂
- Retirement Age: Decide when you want to retire. This will determine how many years of post-retirement income you’ll need. My ideal retirement age is 55, but it might go up to 60 if I need more time to build my retirement fund. Hopefully I do not need to work above age 60. Do note that the official retirement age in Malaysia is 60 years old (as of October 2024).
- Life Expectancy: Based on Malaysian government statistics, average life expectancy across all ethnic groups is 73 years for male and 77.8 years for female as of writing. You can refer to OpenDOSM for the latest statistics.
- Lifestyle Choices: Define the type of lifestyle you want during retirement (e.g., modest, comfortable, or luxurious). This will dictate your expected monthly expenses.
- Location: Consider where you will live after retirement. The cost of living can vary significantly between urban, suburban and rural areas in Malaysia. I prefer to live in a suburban or rural location, so my retirement fund figure is significantly lower compared to someone who may want to retire in the city.
Estimate Your Retirement Expenses
You’ll need to estimate the monthly and yearly expenses required to maintain your desired lifestyle during retirement. Areas of expensese include:
- Basic Living Expenses: Housing, food, utilities, transportation, and other essentials.
- Entertainment: Eating out with family/friends, movie at the cinema, etc.
- Healthcare Costs: Since healthcare costs generally increase with age, do remember to factor in medical insurance premiums (e.g., private insurance) and potential out-of-pocket medical expenses. I recently asked my insurance agent about my medical card and number of years of coverage. This is because I would need to factor in the monthly premium into my retirement fund budget. Depending on how much you are paying, this amount can be significant when you do not have an active income. By the way, my medical card will be active until I reach 80 years old!
- Leisure and Travel: If you plan to travel or engage in hobbies, add an allowance for these activities. It can be an annual budget of RM10,000 – just remember that you will need to stay on budget!
- Inflation Adjustment: Account for inflation over time. RM10 today does not have the same purchasing power or value in 30 years time. You can refer to Malaysia CPI for the latest official inflation rate. At time of writing, the overall inflation rate is 1.9% based on August 2024 data. You can also view the inflation by state to get a more accurate idea of how inflation can affect your retirement fund. For comparison purposes, the average inflation rate in Malaysia is 1.9%, but Pahang is 2.8% and Selangor is 2.3%. These are a true reflection of rising cost of living!
- Formula: Annual Retirement Expenses = (Monthly Expenses X 12) X Inflation Factor
Example: If your estimated monthly expenses are RM 5,000, and you plan for 20 years of retirement, adjust for inflation accordingly.
Estimate the Length of Retirement
- Life Expectancy: Estimate how long you expect to live post-retirement. A typical life expectancy in Malaysia is about 75.2 years. If you retire at 60, you may need to plan for at least 15 years of retirement income. Below is the expected life expectancy by ethnic groups according to OpenDOSM as of writing.
- Malay – 74.4 years
- Other Bumiputera – 74.2 years
- Chinese – 77.1 years
- Indian – 71.7 years
- Non-Citizen Residends – 82.1 years
- Formula: Total Retirement Years = Life Expectancy − Retirement Age
Example: If you retire at 60 and expect to live until 80, you would need income for at least 20 years.
Consider Current Savings and Investments
- EPF (Employee Provident Fund): Estimate your EPF savings by the time you reach retirement. EPF is the primary retirement savings vehicle for most Malaysians, so this will make up the bulk of your retirement fund.
- Personal Savings: Include other savings, fixed deposits, or investment portfolios (e.g., unit trusts, stocks, REITs, or bonds).
- Assets: Consider other assets that could generate income or be liquidated in retirement, such as property or business interests.
Estimate Additional Income Sources
- Pension: If you are eligible for a pension, factor this into your income stream. In Malaysia, this is more applicable for public servants.
- Investment Income: Consider dividends from stocks, rental income from properties, or interest from savings accounts.
- Passive Income: If are earning an income from your website(s), print-on-demand, social media (as an influencer or KOL), or any other methods that are earning you a regular income, put these as your income sources as well.
- Part-time Work or Business: If you plan to continue working part-time or running a business in retirement, this can supplement your income.
Calculate the Total Retirement Amount
The next step is to calculate the total amount you need to save for retirement, based on your expected expenses and the length of retirement.
Formula: Total Retirement Needs = Annual Retirement Expenses X Years in Retirement
Example: If your annual retirement expenses are RM 60,000 (RM 5,000 per month) and you expect to live for 30 years post-retirement:
Total Retirement Needs = RM60,000 X 20 = RM1,200,000
Account for Inflation
To ensure that your savings keep up with inflation, adjust your calculations to reflect the increased cost of living in future years.
Formula: Future Value of Retirement Needs = Total Retirement Needs X (1+Inflation Rate) over Years to Retirement
Example: Assuming an inflation rate of 3% per year, and 8 years until retirement, the calculation would be:
RM1,200,000 X (1.03) over 8 years until retirement
Result: RM 1,520,124.10 (approx.)
Calculate How Much You Need to Save Annually
Based on your current savings and the total retirement amount, calculate how much more you need to save annually or monthly to reach your goal.
Formula (for savings target): Annual Savings Needed = (Years Until Retirement Future Retirement Needs − Current Savings) / Years Until Retirement
Example: If you currently have RM 500,000 saved, and you need RM 1,520,124.10:
Annual Savings Needed = (1,520,124.10 − 500,000) / 8 = RM127,515.51 per year
You can break this down into monthly savings if required.
Adjust for Investment Returns
If you plan to invest your savings, you can adjust the annual savings required based on the expected rate of return from your investments (e.g., stocks, REIT, bonds, unit trusts). This reduces the amount you need to save out of pocket.
Formula:
Future Value of Savings = Current Savings X (1 + Investment Return) over Years Until Retirement
Example: Assuming a 5% annual return on investments.
Review and Adjust Periodically
Retirement planning is dynamic, so it’s important to review your financial plan regularly and adjust for changes in income, expenses, inflation, and investment performance.
Start Planning Your Retirement Fund Early
This framework provides a comprehensive approach to calculating your retirement fund needs by considering your personal goals, lifestyle, and financial situation. Use this as a rough guideline to get you started. For a tailored and accurate plan, consult a certified financial planner who can assess your unique circumstances and provide expert guidance specific to your situation. This ensures that your retirement strategy is both realistic and aligned with your long-term financial well-being. All the best!