Friday, January 22, 2010

Comfortable Retirement

Have you ever calculated how much do you need for your retirement? I bet some of you, even you have, might shock about the figures and wondering how to achieve it.

I recalled way back to the year 2003, I attended a personal financial seminar held at Genting Highlands. There were more than 500 participants and the ball room was extremely crowded. The topics covered goal setting, investment planning and estate planning. During the break of the seminar, I visited a road show counter outside the ballroom. Its notebook was setup to assist visitors to calculate their retirement needs. As I have been a savvy spender, the notebook inform me that I need more than a half a million Ringgit or so to retire even I have relatively low monthly expenses as compared with than others. I was shocked that how do I going to have a half a million Ringgit for retirement as my net worth then was very low. After buying more books on retirement planning, I realize that the figure was generated on the basis of constant principal. In other words, it is assumed that you use only the return generated without touching your principal.

Let us take an example. Assume your family monthly expenses after retirement are $3,000 and you are able to generate an annual investment return of, say, 5%. You will need $720,000 as of the time you retire. It is calculated as follow:

(Monthly Expenses x 12) / Annual Investment Return

= ($3,000 x 12) / 5% = $720,000

By having $720,000 as principal, it will generate $36,000 annually for your living expenses. This formula assumes that your monthly expenses and annual rate of return are constant. However, it is yet to consider inflation and taxation. As you have known, inflation and taxation are the worst enemy of our money. Therefore, you will definitely need more than a million Ringgit for your retirement.

As for me, I would rather opt for gradual principal deduction in my later years of retirement so that I do not need to accumulate so much for my retirement while I am still able to fund my other needs like children’s education. That is, during my retirement, I will use return generated from my investment in early years. While my expenses increase due to inflation and taxation in the later year, I will fund them by using my investment return and part of my retirement principal. However, the trick is, you should ensure your retirement fund balance is enough to support until your expected age. I will share with you how to generate such retirement fund figures in my later post.

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