How much is enough for retirement?
Posted on December 15, 2011, Thursday
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“How much is enough?” said an exasperated and just-betrayed Budd Fox to his mentor turned adversary Gordon Gekko in the 1980s hit Hollywood movie ‘Wall Street’.
In this fourth of five articles on preparing for retirement, we shall analyse how much is really enough? This is a question that pre-occupies many of us, be it the wealthy or the less fortunate.
The question takes on a special urgency when one is faced with a life-changing event such as retirement, when one’s working life and salary ends. It is even more significant for low-wage earners and those who intend to retire early to gauge just how much they have to save to make sure they can live comfortably and avoid poverty.
The difficulty in this is to know how long one will be in retirement, or to put it simply, how long one’s life expectancy is. Usually, most Malaysians end up having to think of a 20 year retirement period, as most retire at 55 years and the average Malaysian’s life expectancy is at 75 years.
So, let’s see now. If we want to fund a 20-year retirement period, then we would need to multiply the monthly target spending amount by 12 and then again by the number of years, herein 20.
Hence, if you need to spend RM1,000 a month during retirement, you times RM1,000 with 12 months and times 20 years to determine how much you need, which is RM240,000 in this instance. Hence, if one wants to have RM1,000 to spend a month for 12 months a year times 20 years which would generate a total of RM240,000 that needs to be saved.
So, if one needs to save RM240,000 by the age of 55 and assuming he works from the age of 22 or for 33 years the amount he would need to save monthly is roughly based on the following series of steps:-
The total amount to be saved is divided by the number of years of the savings period and then divided again by the number of months in a year.
In other words, beginning with the target amount of RM240,000 then divide it by 33 years, and divide again by 12 which works out to be about RM606 a month.
Thing is, if one stops working for a while, or skips a monthly saving (let’s call this a ‘contribution’) or withdraws from this savings pool for whatever reason, then one of two things would happen. Either the amount of RM240,000 will not be reached or one has to save even more later.
Can all Malaysians put aside as much as RM606 a month? Well, looking from aggregate national statistics, it appears possible. According to the 10th Malaysia Plan, a low-income household is defined as one earning less than RM2,500 a month, a middle-income one earns between RM2,500 and less than RM7,000 monthly, and a high-income one earns more than RM7,000 each month.
The recent Household Income Survey shows that the low-income category forms 44.1 per cent of the population, 42.6 per cent of the population are of middle-income, with the remaining 13.2 per cent of high-income.
Hence, using the high point of the ranges above except, of course, for the high-income category, where we would have to use the lower end as there’s no upper limit, we would see that RM606 a month would be approximately 24 per cent of the low-income group’s monthly income, and 8.7 per cent of the high-end of the earnings range of the middle income group as well as the low end of the range for the high income group. It is timely to remember that EPF contributions are 23 per cent of a contributor’s salary.
Unlike the self-employed, the RM606 for fixed-income earners comes from two sources – 11 per cent is deducted from the employees’ salary with the employers having to contribute the 12 per cent. Hence, that RM606 is then split into two proportionately; RM316 from the employers and RM290 from the employees.
This lower amount from the employee makes it easier for all three income groups to meet the target contribution amounts.
Certainly, here it must be recognised that for those earning very low salaries, this amount may be out of their reach. Hence, for them, their pension income must also come from other sources such as welfare or state pensions to avoid old-age poverty. Under the World Bank’s ‘5-Pillars’ pensions system (see the previous articles on this), they are known as income from Pillars 0 and 1, respectively.
Therefore, is RM240,000 the ‘golden sum’ that we have to pursue? Not quite. There are several other variations and considerations when calculating an adequate amount for retirement as we shall see in the next and last article for now.
