How can I start planning for my retirement?

Don’t we all have dreams to retire early so we can have more freedom to enjoy our family, hobbies, and life outside of work? When exactly that is, depends on your goals, your ideal retirement lifestyle, and your retirement savings plan.

To some people, early retirement means hanging up their corporate badges once and for all. To some others, it means more work flexibility, the freedom to decide when and whether to work. This affects your retirement savings plan, which determines when you can retire.

Start by looking at your current annual expenses. You will need to save at least as much for every year of retirement. On top of essential expenses, leave some room for future commitments. If you have dependents such as ageing parents, you need to consider what costs of care you may be responsible for. Budget for unexpected expenses like your own healthcare costs as you age. 

Next, consider your ideal retirement lifestyle. A globe-trotting retirement will surely cost more than a retirement nestled at home. Or perhaps you envision a simple life in a quiet town away from the city, which could mean less expenses. Your retirement savings need to match your ideal lifestyle. In your estimate, include discretionary expenses. Be honest but reasonable about life’s little luxuries: how many trips would you like to take in a year and what hobbies would you like to pursue?

Then look at your income stream(s). Some of them may continue into retirement, such as rental income or investments. Make sure to adjust for inflation by multiplying your expected annual income by the average long-term inflation rate. Malaysia experienced an average inflation rate of 2.3% from 1999-2019, but if you want to be conservative, use a 3-4% inflation rate*.

Once you have planned your retirement expenses, you’re one step closer to knowing how much you need to retire and when you can actually retire.

How much you need largely depends on when you retire and your living expenses, as you’ll need enough to cover the number of years you don’t work or work less (assuming you retire early).

The common formula is to subtract your annual inflation-adjusted retirement income from your annual retirement expenses. This is how much you need in savings for every year of retirement. Multiply this by the number of years you expect to be alive, and that’s the amount you need to save in total for your entire retirement. The average Malaysian life expectancy is 76 years**. Round this number up to at least 80, as you may live longer than average and it’s better to overestimate than underestimate. 

Finally, the differential between how much you need in retirement savings and how much you have in savings now will give you an idea of when you can retire.

Start a retirement fund today if you haven’t already and invest wisely to help you achieve the retirement you want, at the age you want. Also consider whether insurance can help you in your retirement goals – some insurance products guarantee an annual income and provide health coverage.

Source:

* https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?end=2019&locations=MY&start=1999

** https://data.worldbank.org/indicator/SP.DYN.LE00.IN?locations=MY