Planning for Your Retirement
Guide
- Summary
- It is never too early to start saving for your retirement
- Know your retirement needs
Get a sense of your expected expenses during retirement. This includes essentials like food, healthcare, and unexpected expenses like home repairs. - Set a retirement savings goal
- Develop an investment plan to reach your goal and stick to it
DEEP, DEEP DIVE
- Why is planning for your retirement early important?
Planning for your retirement is important because you don’t want to retire and not have enough money to meet your daily needs. Plus, you probably want to have some fun too, so you’ll also need to save up for that as well.
And don’t forget that costs to maintain your lifestyle will go up due to inflation, so the amount you set aside will have to take inflation into account as well.
This is why saving for your retirement beforehand is really important because of the magic of compounding. While a return of 5% a year might not sound like a lot, if you start with RM1,000 with an annual compounding interest of 5%, in 30 years it’ll become more than RM4,000!
This is because the interest you earn on your initial savings increases the total savings you have each year, which means your savings will snowball on their own. This means you’ll achieve your savings goals faster.
It also means that your savings will grow faster than inflation, meaning it won’t lose value over time as costs increase.
So how do you plan for your retirement?
There’s no magic retirement plan that will fit everyone’s preferences. Some would like to spend it relaxing, spending time with friends and family. Some would like to engage in more expensive hobbies, such as golf or photography. So really, retirement planning will be different for everyone.
- Step 1: Know your retirement needs and set a financial goal
People often underestimate how much they’ll need in their retirement. Figure out the type of retirement you’d like to enjoy and budget accordingly.
We’ve come up with a list of common cost items – try to understand how much you’ll need for each item for you to get a sense of how much money you might need to fund your retirement:
- RM2,700 for a single adult
- RM4,500 for a couple without child
- RM6,500 for a couple with two children
You can use these figures to test your predictions. For instance, if you predict that you’ll only need RM1,000 per month, then you may want to revise your calculations as you know that even just a single adult would require at least RM2,700 to maintain a decent lifestyle. And these figures do not take into account inflation so you’ll need to have even more available every month.
Based on our estimates, you should have at least RM578,000 in savings by the age of 55 to be sure that you can cover RM2,700 in monthly expenses until the age of 80. (Assuming 5% returns each year and a 2% inflation rate)
Here’s a table to help you keep track of how much you’ll need to save up each year in order to reach this minimum target.
- Step 2: Setting aside enough savings for your retirement
It’s important to start saving as soon as you can. You should start saving for your retirement as soon as you start working. If you’re able to meet the annual savings amount specified by the calculator, then great! It sounds like you’re on track to retire the way you want. However, if you’re not quite reaching those targets, you’ll need to make some changes to your current lifestyle. So, what can be done?
There are a few ways to close the gap:
- Figure out if you can cut some expenses to increase your savings for your retirement
- You could adjust the lifestyle expectations of your retirement. Living a more simple life in retirement so that you’ll need a smaller amount of retirement money to maintain your lifestyle
And you could boost your savings and investments:
- Placing more of my income every month into (good and safe) investments such as EPF that will lead to a decent return over time
- Step 3: Choose where to invest your retirement savings
How you invest for your retirement depends on your age. The closer you are to your retirement, the less risky your investments should be. This is because if your risky investments go sour, you won’t have much time before you retire to rebuild your retirement fund.
Option 1: EPF
Your mandatory EPF savings should be considered the bare minimum that you should have put aside towards your retirement. As we know, only 18% of Malaysians with an EPF account will have enough savings for their retirement.
Additionally, if you wish to contribute more money per month towards your retirement savings, an easy step to take would be to increase your contribution rate or voluntarily put in more money into your EPF savings.
Remember, EPF is a safe place to invest your money and promises a guaranteed 2.5% returns (for conventional account holders). In fact, over the last 10 years, it has delivered returns of around 6% each year.
Option 2: Private retirement schemes (PRS)
PRS is a voluntary long-term savings and investment scheme to allow people to build up their retirement fund. However, don’t mistake this as a substitute for the EPF scheme. PRS are not capital guaranteed (the principle is not shielded from losses) nor do they have the same guarantees on dividend levels like your conventional EPF savings.
PRS like EPF imposes restrictions on the amounts that you’re able to withdraw. Like with EPF, PRS contributions are also divided 70:30 into two sub-accounts: Sub-Account A and Sub-Account B. Only when you reach the retirement age of 55 years, or in the case of death or emigration, can you fully access your PRS savings. Before you retire, withdrawals can only be made from Sub-Account B, and you’ll be charged an 8% tax penalty.
Types of PRS Funds
There are two methods of choosing how your savings get invested in a PRS. You can opt for the default option in which your provider will allocate you to a core fund based on your age.
Source: https://www.ppa.my/prs-and-you/structure-of-prs/
Or you can self-select your preferred funds for your savings to be invested.
Returns
These are the returns for the top 20 performing PRS funds over a 5 year period. Click here to see the rest.
Source: Morningstar, retrieved on 22 October 2019
Fees
PRS also have a fee structure that can be quite similar to unit trust funds, like sales fees, management fees, and transfer fees. Some PRS providers charge sales fees of up to 3.00% and annual management fees of up to 1.80% in some cases with additional transfer fees if you switch between providers. Remember fees will eat into your returns!
Tax relief
Contributing to PRS will also allow you to qualify for tax relief of up to RM 3,000 (https://www.ppa.my/prs-tax-relief/). Employers also have the option of making PRS contributions on behalf of their employees or matching their contribution. Similar to the tax savings for employees, employers that do so will also be eligible for certain tax deductions.
Comparison to other investments
Compared to EPF
PRS does not offer guaranteed returns, so you’re taking a greater risk by investing in PRS compared to EPF. As mentioned earlier, PRS should act as a complement to your EPF savings rather than a substitute for it.
Compared to Unit Trusts
The primary benefit of a PRS over unit trusts is that it gives you the option of taking a hands-off approach to your investment. PRS funds have a default option that allows the fund manager to automatically adjust your risk allocation so it’s more conservative as you get older.
Option 3: Other investments
You can also consider investing in other investments such as unit trusts and exchange-traded funds to fund your retirement. But remember, for these investments your capital and your returns are not guaranteed.
The further away you are from retirement, the more scope you have for more risky investments as you can afford the risk (if your investments do not perform well, you have many more years of working to make up for it), and can use this in order to accelerate the growth of your retirement fund.
- Step 4: Don’t touch your retirement savings
It’s important to keep your retirement savings for your retirement. According to EPF, 70% of members who withdraw their funds at age 55 use up their savings less than a decade after retiring. This is a massive problem since Malaysia’s average life expectancy is 74.5 years.
Sometimes it may feel like accessing our retirement savings is the only option we have particularly to pay for the downpayment for a home or emergency medical expenses. As much as possible, avoid putting yourself in this position to begin with. You can do this by have sufficient savings for expenses that we can predict (like housing & education) as well as money set aside for a rainy day.
Read Investing 101 to learn more about how to start investing.
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