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What is your retirement number? kcchongnz
What is your retirement number? kcchongnz
Benjamin Franklin — 'If you fail to plan, you are planning to fail!'
Generally people understand the “Retirement number” as the amount of money we will need to have socked away in order to be confident that our post retirement income and retirement life will meet our expectations. Except for the fortunate few who don't have to worry about money, the “Number” has become the holy grail in retirement planning. So what is your number?
Someone told me if one has one million ringgit cash now, he can then retire, assuming that he is debt free, already owned a house, and his children are all financially independent. Do you agree? For me, it is yes and no. This is because everyone's retirement number is different, so stay away from others. This number depends on a number of factors for each individual, among them:
- How large is your required pay check?
- What other source of retirement income that you have?
- How do you generate your retirement pay check?
Retirement Planning: A Simple Approach
Table 1 below shows how much one can withdraw at the beginning of each year with one million ringgit now for different rate of return and number of years of withdrawal.
Table 1: Annual withdrawal for 1 million ringgit principal for various years of retirement and return
|
Return/ Years in retirement |
10 |
15 |
20 |
25 |
30 |
35 |
40 |
|
2% |
91490 |
57989 |
41318 |
31377 |
24802 |
20149 |
16697 |
|
4% |
100000 |
66667 |
50000 |
40000 |
33333 |
28571 |
25000 |
|
6% |
108787 |
75918 |
60000 |
49801 |
43345 |
38776 |
35384 |
|
8% |
117817 |
85681 |
69895 |
60643 |
54653 |
50521 |
47544 |
|
10% |
127056 |
95884 |
80892 |
72346 |
66999 |
63456 |
61018 |
Note: All in today’s ringgit
The amount of annual withdrawal is computed based on the assumptions of a portfolio of cash and equity in various proportions, with the long-term return of cash and equity of 4% and 10% respectively, and an inflation rate of 4%. For example, if you are 55 now and assume that you are going to live up to the age of 75, and the weighted average return of your portfolio at 6%, you are able to withdraw a real amount of RM60,000 a year for the next 20 years. You can withdraw a nominal amount of RM60,000 for at the beginning of next year, RM62400 one year later, RM64900 the following year and so on, until all the money is all used up 20 years later. The amount increases each year by the rate of inflation, but they all have the same purchasing power, i.e. the present value of RM60000. Of course for those who needs a real amount of RM120,000 a year pay check, he need to have double the amount of liquid assets he has now.
RM60,000 withdrawal in today’s ringgit may be enough, or even abundant for many people who are completely debt free and with no other heavy obligations like children’s education, home mortgages etc. One may say that if it is not enough, he can increase his rate of portfolio return to 10% by putting all his assets in equity! How easy? I can see this will open to fierce argument regarding risks and the equity market which we better leave it to another chapter. For others who would prefer to enjoy their fruits of labour to lead a more luxurious life, such as having a bigger house, a better car, or to travel to Europe, US, South American etc, RM60,000 a year is definitely not enough.
Hey, have we consider if the actual return is not as expected? What if the portfolio only return 2%? You can only withdraw RM41300 a year without running out of money in 20 years time as shown in Table 1, or about 30% less! What if you are so durable and only expire in 30 years time? What if the inflation rate jumps to 8%? Are all these possible?
Retirement planning is fraught with important assumptions about many significant, unpredictable events, which can substantially impact cash flow calculations and results. There are simply too many scenarios and variables, both internal such as lifestyle choices, risk appetite and changes when get older; as well as external factors such as inflation, health care costs, variation of interest rate and market return, longevity, unexpected life events etc. That is why I like to do the retirement planning in an annual cash flows basis such that these variables can be adjusted easily at different stages.
Retirement Annual Cash Flows
This annual cash flow analysis can help you determine whether you will outlive your assets. The expenses can be broken down into different categories, discretionary or non-discretionary, fixed, temporary, or changes along the retirement life span. The return will change as for example, one may find his net worth reduced drastically after another financial crisis. In the later part of life, a retiree may have to allocate more if not all his assets into lower risks investment and hence a lower expected return. Many of us may still have one or two children who are depending on us, and the cost of education, which though is for another few more years, can be very high. Some people may still have a housing mortgage to pay for another few more years. With all these incomes and expenses put into a spreadsheet, an annual cash flows projections can be seen clearly. However, bear in mind that this plan is just an "initial" plan, not a real life.
Retirement annual cash flows, a case study
Ah Meng is 55 years old now and his wife is two years younger. They have worked hard for the last 32 years and accumulated some assets, a house worth a million ringgit which still have 10 more years to pay off at RM2500 per month. They have RM200,000 in bank cash and fixed deposit, RM300,000 invested long–term in shares and unit trusts, and a total of RM1,000,000 in EPF. Ah Meng is working as a senior engineer in a public listed company with a total net income of RM150,000 a year (EPF included). As they have 2 more dependent children, one with 3 and the other with 6 more years of study to graduate, he thinks that it is better for him to work another 6 years before retiring at 61. Ah Meng intends to let their children study in Taylors college and then send them to Australia in the final year to complete their course. As Ah Meng is a super risk taker, he intends to withdraw all their EPF money and use them to invest in the equity market to earn a higher expected return, after all, he still has a steady income. He has a life and TPD insurance covering RM500,000 until age 61 and he is paying RM24000 premium for it now. Their household expenses is RM72,000 now and after retirement, he figures that this non-discretional expenses will reduced by 25%. He recognise the high cost of medical care when he retires and he decided to set aside RM100,000 for this purpose. Ah Meng’s wife like to travel and they intend to carry on spending about RM5000 a year for this purpose until they retire. After Ah Meng retires, they will have more time together and intend to travel more overseas and budgeted RM10,000 a year for this purpose. They realize that when they get older, say at 74, they may not be able to travel that often. However they know that their health care will also increase then. Ah Meng did not forget that he has to have money available, say RM80,000 to change to a new car every 10 years. A Honda Civic may be good enough then. The following are some data and assumptions:
Table 2: Data and Assumptions
Cash in banks: 100,000 after setting aside for medical of 100,000
Equity: 300,000 in Malaysian shares and unit trusts
EPF: 1,000,000 To withdraw and invest in equity
Value of house and cars 1,000,000 Not included as liquid assets
Present income 150000/year Wife works as home Finance Minister
Life/TPD insurance RM500,000 Premium RM24,000 per year
Long-term inflation rate: 4% Average rate
Return on Equity: 10% hence real return R=(10%-4%)/(1+4%)
Saving interest rate 5% Real return 1%
Portfolio mix: Equity : cash 93% : 7% before retirement.
50% : 50% after retirement.
All cash after age 85
Annual Cash Flows: The Base scenario
With the above data, Ah Meng’s goals and objectives and the assumptions used, his annual cash flows will look like the following Figure 1. The figure shows that Ah Meng and his wife has no problem living up to 90 years old with the standard of living expected without running out of cash before that. In fact they are likely to be able to leave a legacy of RM200,000 in today’s ringgit to their children, plus the house they have which would have worth a lot of money.
Figure 1: Annual cash flows: Base scenario
Note: In today’s ringgit
Even with reasonable assumptions about investment returns, inflation, and retirement living costs, it's likely Ah Meng will encounter numerous changes to his cash flow over time. What if say the return from equity is 2% less than expected at 8% CAGR?
Reduced return scenario
Figure 2 below depicts a scenario where the long-term return from the equity investment is reduced by 2% from 10% to 8%. This is assuming that the return of equity is not as good as historical because of some of the problems in the world now, such as the enormous trade deficit of the US and the Euro sovereign debt crisis. Moreover, the corruption problems of politicians at home and the indiscrete manner the government is spending the money are also extremely worrisome.
Figure 2: Reduced return from equity by 2%
In the above scenario, with the same income and expenditure but at a reduced return, their money will be finished by the time they reach the age of 77 as shown. Incidentally, that is the approximate mortality age of a Malaysian Chinese female. However, Ah Meng may not be too comfortable with that as according to statistics, at least one of the spouses has a high probability that he or she will live much longer than that. Ah Meng can then adjust his plan; maybe work another 3 years longer, go less for expensive overseas holidays, maybe visit more of China (instead of Europe and other Western countries) as there are heaps of places and interesting things to see and do there too; buy a smaller car etc. They are aware that in the worst case scenario, they still have a house to fall back.
Conclusions
Everyone has his own retirement number according to individual needs and wants, which often varies at a wide range. One must pay attention to external factors such as inflation, volatility of returns, unexpected medical cost and his own longevity which can significantly impact on his “number”. With a retirement annual cash flows projection, one can simulate various scenarios and see where he is at different stages of life. Frequent monitoring of his income and expenses will detect changes that he can take appropriate actions to ensure that the money he has can last for a satisfying retirement before his own expiry.
KC Chong (CFP)
01/04/2014
2nd April 2014
A simple approach: How much do you need to save up for retirement?
Assumptions
Age now 50
Age to retire 60
Years to retirement 10
Age expected to die 80
Present value of retirement expenses per month RM7000 per month
Nominal return of investment during retirement, Rn 6%
Rate of inflation, i 4%
Future value of retirement fund (when die) 0
Future value of monthly expenses, FV = 7000*(1+4%)^10 = RM10,400.
Annual amount, PMT = 12*RM10,400 = RM125,000.
Real return of investment after retirement, Rr =(Rn-i)/(1+i) = 1.92%
Years in retirement, Y = 80-60 = 20
Amount required at retirement, S =ROUND (PV(Rr, Y, PMT ,0) , -3) = RM2,056,000.
Hence you need to save up to a total retirement fund of about RM2 million in 10 years time in order for you to retire with an inflation adjusted RM7000 a month at today’s Ringgit for another 20 years.
How to save a total of RM2 million in 10 years?
Saving RM2 million in 10 years is a daunting task for most people. However, most people would have some savings at the age of 50. There may be substantial EPF too. Besides they are still working with the building up of EPF money. So what they need to do is to top up any short fall from the return of their present investment and expected EPF amount.
Assuming a couple has a total investment of RM300,000 earning a nominal return of 8% per year in the equity market. This amount will accumulate to RM648,000 in ten years time.
Assuming the husband only is working with a salary of RM10,000 per year, and the total EPF contribution of 23%, a monthly contribution of RM2300 is made to EPF, or RM27600 a year. Further assume the couple has RM500,000 in their EPF now. The EPF will be accumulated to RM1160,000 in ten years time when he retires, at a dividend rate of 5%.
FV= FV(5,10,-27600,-500000,0), -3) = 1,160,000
Total = 648,000 + 1,160,000 = 1,1810,000
So the total retirement fund the couple have, without saving anything, would be RM1,810,000. The shortfall is expected to be just RM190,000. This shortfall can be met with a monthly saving of about RM1000 for the next ten years.
They will lead a happy retirement for the rest of their life.
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Discussions
8 people like this. Showing 30 of 30 comments
and dont forget family and friends relationships etc.
dont just die rich but also die happy! :-)
2014-04-01 23:06
Retirement number?
The unintended consequence of fixing a retirement number is the mind stops working and inflation will certainly eat up your so called "adequate retirement number". What matter most is one must acquire investment skills from a businessman perspective, learn from others new ideas and in the process acquire excellent investment skills to sustain the long haul and use the skills to the fullest to grow ones asset backing until one calls it a day or the god almighty calls it a day for all of us.
Having said that one must always live within ones means at any time till the god almighty calls it a day for all of us.
2014-04-01 23:23
A simple approach: How much do you need to save up for retirement?
Assumptions
Age now 50
Age to retire 60
Years to retirement 10
Age expected to die 80
Present value of retirement expenses per month RM7000 per month
Nominal return of investment during retirement, Rn 6%
Rate of inflation, i 4%
Future value of retirement fund 0
Future value of monthly expenses, FV = 7000*(1+4%)^10 = RM10,400.
Annual amount, PMT = 12*RM10,400 = RM125,000.
Real return of investment after retirement, Rr =(Rn-i)/(1+i) = 1.92%
Years in retirement, Y = 80-60 = 20
Amount required at retirement, S =ROUND(PV(Rr,Y,PMT,0),-3) = RM2,056,000.
Hence you need to save up to a total retirement fund of about RM2 million in 10 years time in order for you to retire with an inflation adjusted RM7000 a month at today’s Ringgit for another 20 years.
2014-04-02 05:17
Hi KC Chong, to save RM2m in 10 years, you need to save RM16,667 per month for 120 months. wow, quite a task!!! This figure is for one person or a couple of husband and wife?
2014-04-02 06:17
For me, i plan to have RM2mil for my retirement....after that use these money to buy share with annual dividend >5%.
2014-04-02 07:19
How to save a total of RM2 million in 10 years?
Saving RM2 million in 10 years is a daunting task for most people. However, most people would have some savings at the age of 50. There may be substantial EPF too. Besides they are still working with the building up of EPF money. So what they need to do is to top up any short fall from the return of their present investment and expected EPF amount.
Assuming a couple has a total investment of RM300,000 earning a nominal return of 8% per year in the equity market. This amount will accumulate to RM648,000 in ten years time.
Assuming the husband only is working with a salary of RM10,000 per year, and the total EPF contribution of 23%, a monthly contribution of RM2300 is made to EPF, or RM27600 a year. Further assume the couple has RM500,000 in their EPF now. The EPF will be accumulated to RM1160,000 in ten years time when he retires, at a dividend rate of 5%.
FV= FV(5,10,-27600,-500000,0), -3) = 1,160,000
Total = 648,000 + 1,160,000 = 1,1810,000
So the total retirement fund the couple have, without saving anything, would be RM1,810,000. The shortfall is expected to be just RM190,000. This shortfall can be met with a monthly saving of about RM1000 for the next ten years.
They will lead a happy retirement for the rest of their life.
2014-04-02 07:21
KC Chong : Thank you for your another example. At 60 yr old, I have RM2,056,000, I can receive passive income RM7K(current purchasing power)/month.
My Q is : if at age 70 yr old, I start to deplete the capital till 0 at 80 yr old, the required initial number should be less than RM2,056,000, am I right? Then what is the number ?
Thank you.
2014-04-02 07:32
this is a million dollar question to struggling working middle class.
At age of 30, after working for 7 years i can find myself stuck by paying debts, earnings by >RM8k per mth still not able to live comfortably. By deducting of house loan, daily expenses (petrol, toll, etc), still not having much savings left, probably around 2-2.5k per mth. i am single. Until we find effective plans for having money works for money, a real passive income for us, middle class.
2014-04-02 07:51
bsngpg,
The later you start to draw down your retirement fund, the lease the amount you are required to save up to. You are definitely right here. With the same assumptions, you only need an amount of RM1,656,000 at the age of 70.
FV= ROUND(PV(1.92,10,-183600,0),-3)
Your amount of draw-down is still at RM7000 a month in today's money, or RM15300 a month 20 years later.
One factor you may need to consider is when you are at 70 years old, preservation of capital is more important than return of capital. You may want to put all your money in fixed income earnings a nominal return of 4%, or a real return of zero. Then you may need a sum of RM1,836,000 then.
2014-04-02 07:53
Mr.bsngpg, could you share for youngster like me, at the age of 28-35 what kind of investment would you have invested, for a sum of rm20k annually? I have to ask Rich dad here, as my dad is a Poor one.
2014-04-02 08:05
To have 2mil in 10years, first you need to have 150k cash and go invest by annual return of 30%, after 10years you will have 2mil. It sound like bull-shit, but this is what I am doing it right now. By the way this is only the master plan so called "Vision", if not reach target or 80% done you still have 1.6mil at that time.
2014-04-02 08:08
Retirement number is specific to individuals. It varies according to ones social and economic background.Each individual has his/her own financial status,own needs and wants and the retirement number varies according to every individual. Having said that there is a still a basic common number that applies to every individual in every society.
What determines the basic living expenses for the average Joe?
In this scenario, one need to forecast on basic living expenses that one need to live on a reasonable basis per year and the living expenses covers food and non food living expenses
Next one need to forecast inflation rates in the future years and these rates must be factored into the yearly basic living expenses.
What will be the discounted rates over the years? The discounted rate will be the FD rate as one is computing NOW how much MONEY one needs NOW IN THE BANK to cover ones living in the future years.
The question that begets every person is once you have done the sums , what will be your action plan? Maybe for some they need to downscale and ask for external assistance such as BRIM/etc or work until they can't work anymore....Others who are not daunted may decide on action plans to equip themselves with sound financial investment skills that brings in future cash flows that meets their forecasted future living expenses.
2014-04-02 09:15
Posted by bracoli > Apr 2, 2014 07:51 AM | Report Abuse
this is a million dollar question to struggling working middle class.
At age of 30, after working for 7 years i can find myself stuck by paying debts, earnings by >RM8k per mth still not able to live comfortably. By deducting of house loan, daily expenses (petrol, toll, etc), still not having much savings left, probably around 2-2.5k per mth. i am single. Until we find effective plans for having money works for money, a real passive income for us, middle class.
I don't see you having the problem of getting a real amount of RM7000 a month at today's money when you retire as you are already earning RM8000 a month now at this age of 30. An available saving of 2-2.5k a month is a good number. Continue earning, your income will increase yearly. Continue saving, and invest wisely. A good retirement is not a problem for you, provided, of course you have a plan and stick to it.
2014-04-02 15:33
Posted by Hulk > Apr 2, 2014 08:08 AM | Report Abuse
To have 2mil in 10years, first you need to have 150k cash and go invest by annual return of 30%, after 10years you will have 2mil. It sound like bull-shit, but this is what I am doing it right now. By the way this is only the master plan so called "Vision", if not reach target or 80% done you still have 1.6mil at that time.
Yes, you got the figure right. 150k will become 2m after 10 years with a return of 30%.
However, I think you may not get the mind set right. I am certain that nobody can get a CAGR of 30% investing in the share market from now for the next 10 years. The pendulum is now close to the top of its swing. If you say from 5 years ago you aim to make 30% for 10 years, you may have a chance, but not from now.
One has to be realistic about return from investment. Aiming too high and taking too much risk may be hazardous to your retirement planning.
2014-04-02 16:56
At age 37, i still struggling with having convincingly 10-20% return CAGR. I am lower middle income employees. Now i start to follow your stock portfolio
2014-04-02 19:14
The best investment.
So many people talking about buying this stock or that stock. Actually to me the best investment is yourself, and your career. Without excess income, how to talk about investing? Without the knowledge, how to ensure investment bears good return? With a gun but without any bullet, how to shoot?
Yes, focus on career, earn and safe, and invest in the right way. Like what Buffet said, "I never doubt I will be rich"
Saying is one thing, the right action is another.
2014-04-03 14:12
Thanks for sharing kcchong, mind to share your top 3 share holding? Thanks.
2014-04-03 23:50
The “number” you get from the simplistic computation, the RM2m required for retirement is a very rough one. The real annual cash requirement is not a constant sum. It changes yearly according to your needs and wants. for example, just after your retirement, you may want to tour the world with your spouse every other year initially, and less later. You may still have mortgage to pay and one child still have three more years in University. You may want to buy a new car every 5 years etc. When you grow older, you may incur higher health care costs. Your may prefer to put your investment in safer instrument earnings lower but more stable return when you get older. In essence, the annual cash flow during retirement is not constant but can change significantly each year. So how do you know a fixed amount is adequate for you to get by your full retirement?
This can be done better using the annual cash flow analysis on a spreadsheet. The example given in the post for “Ah Meng” shows how, while still in employment can save and invest to build up their nest egg for retirement first with a base scenario, and then how retirement fund is being drawn down during retirement. Sensitivity analysis can then be carried out with different scenarios such as change in return of investment, different years of working before retirement, unforeseen circumstances such as death or disability of a spouse etc. Furthermore, this initial retirement plan can be monitored closely and altered easily as circumstances change.
2014-04-04 07:42
No need to be so calculative : once you stop breathing, all what you accumulate can't be enjoyed and can't bring it forward into grave.
2014-04-06 23:37
why scare?
Nothing to be scared of, everything which has a start will have an end.
2014-04-06 23:41
During that time, the important things maybe is not $$$$$$. But, others like parents, wife and childs!
2014-04-06 23:45
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bsngpg
Hi KC Chong : thank you for the very comprehensive way in discussing retirement number. I understood your article but do not know how to calculate with your method. You did not disclose the calculation method, did you? Would you consider disclosing the method?
I have a very simple DREAM:
i) Debt free with own house and car.
ii) Average RM10K of passive income/month. This RM10K can be a combination of dividend from equity, rental from real estate etc.
iii) Standard of life: equivalent to your example with RM60K/year(RM5K/month) or slightly higher. Thus I will have excess cash each month at the early part of the plan to cover unforeseen happening and also inflation. I do not know how to calculate the present value of the 10K. However I believe the extra 5K/month(10K-5K=5K) should be sufficient to cover inflation.
iv) With (iii), this RM10K should able to last for many years. If there are few unforeseen extra expenses or reduced return(i.e. financial crisis), then the capital can be withdrew at the later part of the retirement when passive income is less than RM10K/month.
v) With that, I hope that I can retire comfortably.
vi) So now, I need to work very hard in pursuing the ultimate dream of RM10K/month.
What is your comment?
Thanks.
2014-04-01 21:19