2 years ago, you would be shocked when you read the news “Most Malaysians cannot afford to retire” published by The Star Newspaper on 25th Oct 2017. After reading it, you definitely would have asked what have led to this tragedy; spending almost 40 to 50 years in the workforce but yet do not have the financial capabilities to even feed ourselves during retirement age. Retirement is always a dream for most people, able to do the things we love like travelling, spending time with love ones or having nice meals whenever we feel to without financial constraints.
In school, we learnt so many different subjects. We learnt language literature and complex mathematics, differentiation and integration, and yet, the application of this knowledge is only a small part of our life, for some, not even a small part. We use money every day, but the school does not teach us about money, what an irony.
So, what makes retirement only a dream for most people? Well, due to inflation.
When we were young, we used to hear this from our parents, “Back in the days, you can get a big bowl of hot noodle for just RM0.20, and you will be able to have extra 5 big fish balls by adding another RM0.05. But it is not the same now, everything is so expensive.” Back then we usually could not understand what our parents meant until we experienced it ourselves.
15 years ago, a pack of chicken rice would cost about RM2.50. Just by adding another RM0.50, you will be able to have extra chicken meat. But right now, how much does a pack of chicken rice cost? In Klang area it costs at least RM6.00. In some prime locations for example Kuala Lumpur, it will be about RM10.00.
Same amount of rice, same amount of chicken, same amount of cucumber, same amount of soup and yet the price goes up. Probably some might argue that the amount of chicken has reduced too.
However, that is only the first part. The second part of inflation comes where the average salary does not grow as fast as the inflation rate. The purchasing power of our money will only deteriorate because inflation will always be there no matter what as it is essential for economic growth.
So how much do you need to retire?
It of course varies among different people, it depends on your preferred lifestyle and how long you live. To illustrate the amount of money you need to retire, let’s have some variables as constants. Let’s assume that your retirement age is 65, and you will be able to live up to 85 years old. Assuming an inflation rate of 3%. Let’s assume that you can only spend RM2000 of today’s value every month.
If you are in your twenties today, you will need around RM2.2 million to retire safely at the age of 65 until 85. Because when you reach the age of 65, RM6500 will be the same as RM2000 of today’s value due to inflation.
If you are in your thirties today, you will need around RM1.7million to retire safely at the age of 65 until 85. Because when you reach the age of 65, RM4900 will be the same as RM2000 of today’s value due to inflation.
If you are in your forties today, you will need around RM1.2 million to retire safely at the age of 65 until 85. Because when you reach the age of 65, RM3600 will be the same as RM2000 of today’s value due to inflation.
If you are in your fifties today, you will need around RM0.9 million to retire safely at the age of 65 until 85. Because when you reach the age of 65, RM2700 will be the same as RM2000 of today’s value due to inflation.
Based on the calculations above, is it safe to say that you need to be at least a millionaire to retire safely? Becoming a millionaire is no longer a luxury in Malaysia but a must. And bear in mind, this is only RM2000 per month of today’s value. If your preferred lifestyle requires higher expenses than RM2000, you will need to multiply that amount. The only way to reduce the amount you need is to spend lesser than RM2000 per month of today’s value or have a shorter life expectancy.
But, let’s just take RM1 million as the benchmark, the question is, how many years do you need to save just to hit RM1 million?
If you were to save RM1000 per month, you need to save a total of 1000 months, which is about 83 years to have a total savings of RM1 million. What if you can’t save RM1000 per month or not even RM500 per month? Again, even if you manage to accumulate RM1 million, you can only live a lifestyle of RM2000 per month of today’s value.
Well, that’s the ugly truth. That’s why most people are not able to retire despite they have spent most of their lifetime in the workforce.
Since you can’t retire based on savings, you must invest your money.
Investing is a must. “The primary objective of investing is not to grow your wealth, but to beat inflation,” Warren Buffett. Speaking of investing, of course, most people will be afraid to invest their money because they thought investing is very risky. Well, if you are already in a losing position (because to retire purely based on savings is very difficult), why not get out of your comfort zone to learn the skillset and mindset how to invest your money safely?
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.
This article was written by Team VIC
Team VIC is formed by experienced and well-trained individuals from Value Investing College (VIC). The team has been consistently studying the latest stocks market trend in order to focus on educating the layman on investment principles and techniques.