RETIREMENT a.k.a financial freedom is a default financial goal in financial planning. Everyone who retires will still need food, shelter, and clothes for basic survival. Retirement income depends on how much we have accumulated from our active income.
What could have gone wrong in retirement planning?
- I can start saving later
The consequence of delayed saving is to pay more later. Have you wondered that one of the biggest assets could be our mandatory contribution to EPF (Employees Provident Fund)? An employee has to set aside an amount every month.
This consistent and disciplined approach is able to accumulate wealth over the long term.
Which is easier to achieve a million? Saving RM500 every month now or starting nearer to your retirement?
At RM500 per month and 7.44% interest per year, you could become a millionaire in 35 years. Besides, the total you need to save is RM210,000 to achieve a million.
If you start 10 years later, you will need to save RM1,150 per month over the course of 25 years at 7.44% interest per year. Total savings required is RM345,000.
In the above example, the cost of delayed savings is forking out RM135,000 more.
Thus, the importance of time cannot be overstated. If you think you are too late, are you able to start again? The answer is yes. Start saving now even if you are near retirement today. You will still need the retirement income for the next 20 to 30 years depends on the mortality.
- I should have enough for retirement income
Retirement income need to be reviewed from time to time. The figure may change due to various factors, such as lifestyles, interest, inflation, retirement age, environment, and ability to save.
The wealth you have accumulated is certain for retirement income, not what you expect to have.
For example, a near retiree hopes to sell his business at a value that can cover most of his retirement income. To his disappointment, he may be unable to sell his business at the expected value.
Another example would be that of a high-income earner who plans to retire early. The plan changes due to retrenchment.
A retiree may encounter unplanned events such as medical needs or support in his children’s financial issues. Consequently, these situations may erode his retirement funds.
Try Alpine’s retirement calculator for a basic calculation of retirement income needs at https://alpine-advisory.com/retirement-calculator/
- Saving via the wrong financial instrument
Here are two scenarios. Scenario one is to save money in a locked container and keep it for the next 20 years.
Scenario two is to save money in an investment account which may generate a 7% annualised return. Which scenario would have more money after 20 years? The likelihood would be scenario two.
The discipline and consistent saving concept are beautiful. Selecting the right financial instrument is crucial to make the difference.
For example, a monthly saving of RM500 into bank account with 1.5% interest per annum for next 35 years has a future value of RM275,962. On the other hand, the same amount of saving into investment that generates 7% interest per annum for next 35 years results in a future value of RM900,527.
Even more, the amount of RM500 may look little but it does make a huge difference. – Nov 14, 2021
Kelly Wong, CFP is a CEO and Licensed Financial Planner of Alpine Advisory Sdn Bhd. She is a Certified Member of FPAM.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
