How To Calculate The Retirement Fund You NEED!

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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.

Age3% Inflation 4% Inflation 5% Inflation
40 Years5,0005,0005,000
50 Years6,7207,4018,144
60 Years9,03110,95613,266
70 Years12,13616,21721,610
80 Years16,31024,00535,200
90 Years21,92035,53357,337

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 :

Age3% Inflation 4% Inflation 5% Inflation
40 Years60,00060,00060,000
50 Years80,63588,81597,734
60 Years108,367131,467159,198
70 Years145,636194,604259,317
80 Years195,722288,061422,399
90 Years263,034426,401688,044

 

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 Lifespan5.4% Net Withdrawal4.4% Net Withdrawal3.4% Net Withdrawal
20 YearsRM 2,006,790RM 2,987,895RM 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 YearRM 100,340RM 149,395RM 234,115
How Much To Save Per MonthRM 8,362RM 12,450RM 19,510

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

 

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