Retiring with RM1 Million in Malaysia: How Far Will It Take You?

Retirement is a crucial transition in life, marking the shift from earning a regular income to living off your savings. In Malaysia, the average life expectancy is around 74.8 years, meaning that if you retire at 60, you need to ensure your savings last for nearly 15 years.

The concern of inadequate EPF savings is significant. As of September 2023, nearly half of Malaysians under 55 have less than RM10,000 in their accounts, which would only provide a meager RM42 per month over 20 years. This highlights the importance of having a substantial retirement fund.

Traditionally, RM1 million has been seen as a financial milestone, a sum that bestows the title of 'millionaire.' But in the context of retirement, is it sufficient?

Breaking it down, RM1 million over 14 years amounts to about RM71,428 per year or RM5,952 per month. While this might be adequate for a simple lifestyle in a smaller town with no major financial obligations, it may fall short for those who wish to maintain their current standard of living.

Ensuring that your retirement years are comfortable and stress-free requires careful planning and consideration.

How Much Do We Need to Retire?

A simple rule of thumb suggests aiming for around two-thirds of your current income annually to maintain your lifestyle in retirement. To understand this better, let's explore the average household income for different economic groups in Malaysia: B40, M40, and T20, and determine how much each group might need for a comfortable retirement.

A Quick Refresher on Income Groups

According to the Department of Statistics Malaysia (DOSM) in 2022, the mean (average) household incomes were as follows:

• B40: RM3,401
• M40: RM7,971
• T20: RM19,752

Required Savings by Income Groups

The table below summarizes the retirement savings needed for 20 years across different income groups, both with and without accounting for a 2% inflation rate:

This shows that, at the very least, you would need anywhere from RM 800k to RM 4.7 million to sustain your current lifestyle.This figure is significantly higher than the minimum savings of RM240,000 suggested by EPF, which can be quite alarming.

Other Factors Taken Into Retirement

While the above calculations provide a good starting point, several other factors should be considered to ensure a comfortable and secure retirement:

1. Healthcare Costs: As you age, healthcare expenses typically increase. It’s essential to account for medical insurance premiums, out-of-pocket expenses, and potential long-term care costs. Malaysia offers both public and private healthcare options, with private healthcare generally being more expensive.
2. Lifestyle Choices: Your retirement lifestyle can significantly impact your expenses. If you plan to travel frequently, pursue hobbies, or maintain an active social life, your costs will be higher than if you prefer a more subdued lifestyle.
3. Housing Costs: Whether you own your home outright, have a mortgage, or plan to rent, housing costs will continue to be a significant part of your budget. Additionally, consider the cost of maintenance and possible modifications to accommodate aging.
4. Retirement Location: The cost of living varies significantly between different regions in Malaysia. Retiring in a smaller town or rural area may be less expensive than living in a major city like Kuala Lumpur. Consider the impact of your chosen retirement location on your overall expenses.
5. Inflation: Even a modest inflation rate can erode the purchasing power of your savings over time. It's crucial to factor in inflation to ensure your savings will suffice throughout your retirement years.
6. Emergency Fund: Unforeseen expenses such as major health issues, home repairs, or other emergencies can arise. Having a separate emergency fund can help cover these unexpected costs without depleting your retirement savings.
7. Longevity: People are living longer, which means your retirement savings might need to last 20 years or more. It's essential to plan for a longer retirement to avoid outliving your savings.

The Retirement Number That Works for You

Determining your retirement savings goal is a highly personalized process, as there is no universal formula. While some experts suggest multiplying your current income by 25 or the two-thirds of monthly income to get a ballpark estimate, a more accurate approach involves several steps. Here's how to calculate your retirement number and figure out how much you should save each month to reach your goal:

1. Determine how much income you'll need after you retire

Typically, retirees need about two-thirds of their pre-retirement income to maintain their standard of living. Adjust this percentage based on your lifestyle goals. For instance, if you plan to downsize, you may need less; if you plan to travel extensively, you may need more.

2. Estimate your other income sources

Consider other income sources like investment plans, business income, or rental income in addition to the basic pension provided by EPF. These additional streams can significantly supplement your retirement savings. For example, income from rental properties can provide a steady cash flow, and dividends from investments can help cover monthly expenses. 

3. Calculate your income need from your retirement savings

Subtract your other income sources from your total income need. For example, if you need RM120,000 annually and expect RM40,000 from other sources, you'll need RM80,000 from your savings.

4. Determine how much you'll need in savings

Using the 4% rule, which suggests you can withdraw 4% of your savings annually without running out of money, multiply your income by 25. If you need RM80,000 annually, aim for a savings goal of RM2 million.

5. Adjust for inflation

Inflation erodes purchasing power over time. Adjust your savings goal by considering an average inflation rate of 2% per year. Use the formula 1.02^n where n is the number of years until retirement. For instance, if you have 20 years until retirement, multiply your savings goal by 1.49, resulting in a target of RM2.98 million.

Retirement Savings Needed (with income from other sources)

Here's a table that illustrates the retirement savings needed for different annual income requirements, considering other income sources and adjusting for a 2% inflation rate over 20 years.

Retirement Savings Needed (without income from other sources)

If you don't have other income sources, you'll need to rely entirely on your retirement savings to meet your spending requirements. Here's how much you will need:

Is RM1 Million Really Enough for Retirement?

There is no ultimate figure for retirement because everyone has different needs and wants. Your retirement fund should reflect your lifestyle and financial obligations. Here are some questions to ask yourself:

1. Are you a lavish spender or a thrifty saver?
2. Will you have passive income post-employment?
3. Does your health require a lot of monthly medical expenses?
4. Do you have enough medical insurance coverage?
5. When do you plan to retire?
6. Do you have an emergency fund?
7. Will you still have other financial obligations after retirement (e.g., child’s education, mortgage)?
8. What is the average inflation rate?
9. How many years until your retirement?

Ultimately, whether RM1 million is enough for retirement depends on your personal vision and financial obligations. If your plans include extensive travel, luxurious living, or if you have ongoing financial commitments such as a mortgage or supporting a child's education, you might need to aim for a higher amount. 

However, if you anticipate a simpler lifestyle with minimal financial obligations, RM1 million could be sufficient to ensure a comfortable and secure retirement. By carefully considering your expected expenses and financial responsibilities, you can better determine the adequacy of your retirement savings.

Invest to Earn Your First RM1 Million

When building a retirement fund, choosing low-risk investment instruments is essential due to the long-term nature of these investments. Here are some viable options:

1. Amanah Saham Bumiputera (ASB)

ASB is a unit trust scheme managed by Amanah Saham Nasional Berhad (ASNB) for Malaysian Bumiputras. It allows investments up to RM300,000. Historically, ASB has provided robust returns, ranging from 4.60% to 8.7% per annum over the past ten years, thanks to its strategic asset allocation, including significant stakes in blue-chip companies and a portion in overseas markets. Investors can also borrow from banks to invest in ASB, provided they can service the interest payments.

2. Wealth Management Platforms or Robo Advisors

Wealth management platforms such as StashAway use algorithms to manage portfolios based on your risk tolerance and goals. They typically charge lower fees compared to traditional investment funds and offer the convenience of starting with minimal initial investments.

3. Private Retirement Scheme (PRS)

PRS is a voluntary investment option to supplement your retirement savings alongside EPF. Contributions to PRS can provide tax relief up to RM3,000. However, it has restrictions on early withdrawals, with an 8% tax penalty for non-qualifying withdrawals. PRS funds have shown promising returns, with the top funds delivering annualized returns between 6.63% and 9.94% over the past five years.

4. Real Estate Investment Trusts (REITs)

REITs offer an entry into property investment with high dividend payouts (4% to 8%) and potential capital appreciation. Malaysian REITs invest in diverse property types, from retail and hotel to office and industrial spaces. They distribute at least 90% of their income to investors. Some top REITs in Malaysia include KLCC, IGBREIT, SUNREIT, and PAVREIT.

5. Unit Trust Funds

Unit trusts allow investors to pool resources into a diversified portfolio managed by professionals. They offer a low entry point (as low as RM1,000) and diversify across various asset classes. However, be mindful of costs such as sales fees, platform fees, and management fees, which can impact returns.

6. Exchange Traded Funds (ETFs)

ETFs combine benefits of stocks and mutual funds, often tracking a benchmark index. They offer a passive investment strategy with lower fees and easy access to a broad investment spectrum. Notable ETF providers in Malaysia include AHAM Asset Management, AMFunds Management, and Kenanga Investors.

7. Blue Chip Stocks

Blue chip stocks represent shares of well-established companies with stable growth and regular dividends. In Malaysia, top blue chip stocks like Malayan Banking Berhad, Public Bank Berhad, and CIMB Group Holdings Berhad offer dividends from 4.2% to 6%. These stocks are suitable for long-term investments but involve medium to high risk.

8. P2P Lending

P2P lending allows individuals to lend money directly to businesses in exchange for interest payments, offering returns of about 10% per annum. Platforms like Funding Societies and Fundaztic facilitate these investments. Due diligence is crucial due to the higher risk of default.

9. Equity Crowdfunding

Equity crowdfunding allows investments in startups and early-stage companies. The Securities Commission Malaysia regulates it, and there are nine licensed platforms, including Ata Plus and pitchIN. Minimum investments vary, and while ECF offers high returns, it comes with high risks.

10. Cryptocurrency

Cryptocurrency offers high potential returns but is highly volatile. Platforms like Luno and Tokenize are authorized by the Securities Commission Malaysia. Experts recommend limiting crypto investments to a small portion of your portfolio due to the high risk involved.

Power of Compounding Interest

One of the most powerful concepts in investing is compounding interest, which allows your investment returns to generate their own earnings over time. By reinvesting your returns, you earn interest on both your original principal and the accumulated interest from previous periods. This exponential growth can significantly boost your retirement savings, especially when invested over a long period. For example, if you invest RM10,000 at an annual return rate of 7%, it could grow to nearly RM20,000 in ten years, RM40,000 in twenty years, and RM80,000 in thirty years, demonstrating the power of compounding.

By diversifying across these investment options and considering your risk tolerance and financial goals, you can build a robust retirement fund to ensure a comfortable and secure retirement.