Retirement Planning

Envision Your Retirement

Retirement is a state of mind as well as a financial issue. You are not so much retiring from work as you are moving into another stage of your life. Some people call retirement a "new career."

What do you want to do in that stage? Travel? Relax? Move to a retirement community or to be near grandchildren? Pursue a favorite hobby? Go fishing or join a country club? Work part time or do volunteer work? Go back to school? What is the outlook for your health? Do you expect your family to take care of you if you are unable to care for yourself? Do you want to enter this stage of your life earlier than normal retirement age or later?

The answers to these questions are crucial when determining how much money you will need for the retirement you desire - and how much you'll need to save between now and then.

Let's say you plan to retire early, with no plans to work even part time. You'll need to build a larger nest egg than if you retire later because you'll have to depend on it far longer.

Estimate How Much You Need to Save For Retirement

Now that you have a clearer picture of your retirement goal, it's time to estimate how large your retirement nest egg will need to be and how much you need to save each month to buy that goal. This step is critical! The vast majority of people never take this step, yet it is very difficult to save adequately for retirement if you don't at least have a rough idea of how much you need to save every month.

There are numerous worksheets and software programs that can help you calculate approximately how much you'll need to save. Professional financial planners and other financial advisors can help as well. At the end of this booklet, we provide some sources you can turn to for worksheets.

Regardless of what source you use, here are some of the basic questions and assumptions the calculation needs to answer.

How much retirement income will I need?

An easy rule of thumb is that you'll need to replace 70 to 90 percent of your pre-retirement income. If you're making RM50,000 a year (before taxes), you might need RM35,000 to RM45,000 a year in retirement income to enjoy the same standard of living you had before retirement. Think of this as your annual "cost" of retirement. The lower your income, generally the higher the portion of it you will need to replace.

However, no rule of thumb fits everyone. Expenses typically decline for retirees: taxes are smaller (though not always) and work-related costs usually disappear. But overall expense may not decline much if you still have a home loan and children college expenses to pay off. Large medical bills may keep your retirement costs high.

Much will depend on the kind of retirement you want to enjoy. Someone who plans to live a quiet, modest retirement in hometown kampung will need a lot less money than someone who plans to be active, take expensive vacations, and live in an expensive place like Kuala Lumpur.

For younger people in the early stages of their working life, estimating income needs that may be 30 years in the future is obviously difficult. At least start with a rough estimate and begin saving something - 10 percent of your gross income would be a good start. Then every 2 or 3 years review your retirement plan and adjust your estimate of retirement income needs as your annual earnings grow and your vision of retirement begins to come into focus.

How long will I live in retirement?

Based on current estimates, a male retiring at age 55 today can expect to live approximately 24 years in retirement. A female retiring today at age 55 can expect to live approximately 28 years. And the likelihood of living at least 20 years for someone retiring at 55 today is high - over 64 percent for a man and about 75 percent for a woman.

These are average figures and how long you can expect to live will depend on factors such as your general health and family history. But using today's average or past history may not give you a complete picture. People are living longer today than they did in the past, and virtually all expert opinion expects the trend toward living longer to continue.

Planning for Retirement While You Are Still Young

Retirement probably seems vague and far off at this stage of your life. Besides, you have other things to buy right now. Yet there are some crucial reasons to start preparing now for retirement.

You'll probably have to pay for more of your own retirement than earlier generations.

The sooner you get started, the better.

You have one huge ally - time. Let's say that you put RM1,000 at the beginning of each year into an ASB from age 20 through age 30 (11 years) and then never put in another sen. The account earns 7 percent annually. When you retire at age 65 you'll have RM168,514 in the account.

A friend doesn't start until age 30, but saves the same amount annually for 35 years straight. Despite putting in three times as much money, your friend's account grows to only RM147,913.

You can start small and grow. Even setting aside a small portion of your paycheck each month will pay off in big dollars later.

Calculate your EPF saving projection if you contribute to EPF. Check if by age 55, you will have enough nest-egg to fund your retirement years.

If EPF is not enough or if you are not contributing to EPF, then you must start saving for your retirement. Developing the habit of saving for retirement is easier when you are young.