How To Calculate The Retirement Fund You NEED!

If you were shocked by how much money you need for your retirement fund, you may be wondering – how did we come up with those figures.

In this article, we will show you how we calculate our retirement fund figures. You can then use the same methodology to calculate how much you need for your own retirement fund!

How To Calculate The Retirement Fund You NEED!

 

Before You Calculate Your Retirement Fund Requirements

Before you calculate how much you need to retire, you will need a few details :

  1. Your Current Age (A)
    This will determine how much time you have to build up your nest egg. Let’s use a hypothetical age of 40 years.
  2. Your Desired Retirement Age (B)
    When would you like to retire?
    The mandatory retirement age in Malaysia is 60 years, so let’s use that.
  3. Your Life Expectancy (C)
    We would all love to live forever, but realistically, we will all kick the bucket at some point.
    The life expectancy for a typical Malaysian is 75, and 83 for Singaporeans, so let’s use 80 years
  4. The Average Inflation Rate (D)
    The value of goods and services increase over time, and this impacts the value of the retirement fund.
    This varies wildly over time, but from 1973 to 2019, inflation in Malaysia averaged 3.53%.
    So we will look at three different inflation rates – 3%, 4% and 5%.

Historical inflation rate for Malaysia

  1. Your Desired Monthly Pension (E)
    If you have to retire today, how much money can you (or your family) comfortably retire on, based on current cost of living?
    Let’s use RM 5,000 per month.
  2. The Anticipated FD Rate (F)
    The fixed deposit rate is a good indication of what’s safe and stable for a retirement fund.
    Let’s use the current rate of 3.4% per annum.

Recommended : Why It’s Time To Start Saving For Your Retirement Fund!

 

1. Calculate How Long Your Retirement Fund Should Last

First, you need to figure out how long you want your retirement fund to last :

Life Expectancy (C) – Desired Retirement Age (B)
= 80 Years – 60 Years
= 20 Years

 

2. Calculate Your Gross Withdrawal Rate

When you start withdrawing from your retirement fund, how much can you withdraw every year?

The gross withdrawal rate is easy to calculate :

100% / Number Of Years
= 100% / 20 Years
= 5% per year

However, if you actually withdraw using your gross withdrawal rate, you will LIKELY end up short because of the inflation rate.

Retirement Next Exit

 

3. Calculate Your Net Withdrawal Rate

For a more accurate assessment, you need to calculate your net withdrawal rate :

Inflation Rate -3.0% -4.0% -5.0%
Gross Withdrawal Rate +5.0% +5.0% +5.0%
FD Rate +3.4% +3.4% +3.4%
Net Withdrawal Rate +5.4% +4.4% +3.4%

 

4. Calculate Your Starting Pension

Now, you know how much you need TODAY to live comfortably, but how much do you need when you retire at 60 years of age?

Let’s say your family needs RM 5,000 a month to survive.  This table show you how much MORE you will need to maintain the same living standards, in steps of 10 years.

Age 3% Inflation 4% Inflation 5% Inflation
40 Years 5,000 5,000 5,000
50 Years 6,720 7,401 8,144
60 Years 9,031 10,956 13,266
70 Years 12,136 16,217 21,610
80 Years 16,310 24,005 35,200
90 Years 21,920 35,533 57,337

Since we plan to retire at 60 years of age, we will need between RM 9,000 and a little more than RM 13,000.

Before we proceed, you need to further convert that into an annual sum :

Age 3% Inflation 4% Inflation 5% Inflation
40 Years 60,000 60,000 60,000
50 Years 80,635 88,815 97,734
60 Years 108,367 131,467 159,198
70 Years 145,636 194,604 259,317
80 Years 195,722 288,061 422,399
90 Years 263,034 426,401 688,044

 

4. Calculate How Big Your Retirement Fund Needs To Be

Now, you can use your Net Withdrawal Rate and the Starting Pension to calculate how big your retirement fund needs to be :

Starting Pension / Net Withdrawal Rate
= RM 108,367 / 0.054
= RM 2,006,790

Here is what we came up with for the three inflation rates :

Retirement Lifespan 5.4% Net Withdrawal 4.4% Net Withdrawal 3.4% Net Withdrawal
20 Years RM 2,006,790 RM 2,987,895 RM 4,682,290

 

5. Calculate How Much You Need To Save!

Finally, you should find out how much you need to save to achieve your retirement fund target!

Assuming you are 40 years old, and will retire when you are 60 years old :

Target Retirement Fund / Working Years Left
= RM 2,006,790 / 20 Years
= RM 100,339.50 per year

Yearly Savings Required / 12 Months
= RM 100,339.50 / 12 Months
= RM 8,361.63 per month

RM 2,006,790
Retirement Fund
RM 2,987,895
Retirement Fund
RM 4,682,290
Retirement Fund
How Much To Save Per Year RM 100,340 RM 149,395 RM 234,115
How Much To Save Per Month RM 8,362 RM 12,450 RM 19,510

Recommended : Why It’s Time To Start Saving For Your Retirement Fund!

 

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