How Much $$ Is Enough?

A friend of mine asked me how much should he start investing in order for him to retire comfortable at the age of 55? Apart from the EPF he is already contributing, he would like to have an alternate investment that could supplement his retirement lifestyle and at the same time ensuring that his next of kin would be able to inherit additional cash when he passes on.

From our conversation, he has agreed to share his personal details in my blog and wants to be known only as Friend X to the readers.

Now let's begin with the basic information of this friend of mine:

Name : Friend X

Age : 35 years old

Expected Retirement Age : 55 years old

Yearly Drawn Salary : RM72,000

Expected Yearly Expenses After Retirement : RM60,000 (based on current lifestyle)

Inflation Rate : 5% per year

Initial Investment Amount : RM3,000

Investment Objective : How much should Friend X invest monthly starting from now in order to meet his expected yearly expenses after retirement?

Expected Yearly Expenses After Retirement

Firstly is to calculate the projected Expected Yearly Expenses After Retirement (factoring in inflation rate of 5% year) when Friend X arrives at the age of 55. 

Based on calculation, Friend X's expected yearly living expenses would be approximately RM159,200. 

We both agreed that when he turns 55, he would like all his investment to be moved to low risk investment such as Fixed Income Funds which would generate about 6% in returns annually. With that, we are able to calculate the amount of retirement investment needed in order to generate RM159,200 annually worth of returns based on 6% annual return upon investment.

Amount of Retirement Investment Needed 

We both agreed that when he turns 55, he would like all his investment to be moved to low risk investment such as Fixed Income Funds which would generate about 6% in returns annually. With that, we are able to calculate the amount of retirement investment needed in order to generate RM159,200 annually worth of returns based on 6% annual return upon investment.

Amount of Retirement Investment Needed = (RM159,200 / 6%) x 100% = RM2,653,333

Do take note that Friend X wishes to retire with no worries about money. Therefore his choice as mentioned above is to save/invest as much as possible now in order for him to reap the benefits by living on the interest/divident/annual returns when he retire. 

Our next calculation is to find out how much Friend X needs to invest on a monthly basis to achieve his target retirement investment value of RM2,653,333. We both agreed that he is willing to take the risk by investing into equity funds which on the average tend to deliver about 10-15% per annum returns. The returns are also reinvested back into the fund as Friend X does not need that money since he is still earning a fixed salary job.

Calculating Monthly Contribution to Investment

Target Retirement Investment Value : RM2,653,333

Average Investment Return : 12% per annum

Initial Investment Amount : RM3,000

Investment Period : 20 years

With the information above, we are able to determine how much should Friend X monthly contribution towards investment as shown below:

Monthly contribution for Friend X into investment is calculated to be RM2,660 / month.

Summary

Although the monthly contribution for Friend X seems to be a huge amount, my advice to him is to invest as much as he could possible afford to first. The target for him is to allocate at least 30% of his salary for investment and apart from that, to invest additional amount whenever he obtains his annual bonus. 

Although Friend X might not be able to meet the monthly contribution calculated, he has made the right choice by starting now and planning for his retirement 20 years down the road. As the saying goes, the early bird, get the juiciest among all worms. It's never too late or too old to start investing for your future. Do it not only for yourself but for your family.

Would you like me to calculate your retirement investment? Then drop me an email at sickfreak03@gmail.com

Cheers and Happy Investing!

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