How To Calculate The Retirement Fund You NEED!

Dr. Adrian Wong

5 years ago

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!

Before You Calculate Your Retirement Fund Requirements

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

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.
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.
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
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%.

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.
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.

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.

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

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