Determining
How Much You'll Need for Retirement
Estimating the amount you'll need to
fund a comfortable retirement can seem like a daunting task, even to the
most experienced investor. But by taking time to carefully evaluate  your
projected expenses, review income sources, and consider the impact of inflation
on your nest egg, it's possible to take the guesswork out of retirement
planning and begin to prepare with confidence.
Map out your future
On average, people find that they
need approximately 70 percent to 80 percent of their current income to
retire comfortably. So, for example, if your current annual income is RM50,000,
you can expect to need approximately RM35,000 per year in retirement.
The first step in determining whether
this estimate will work for you, however, is to visualize what you'd like
your retirement to look like. Will you travel? Are you hoping to move to
a milder climate? How about taking up a hobby? Spend some time dreaming
about your expectations for retirement; this will help you forecast the
amount you'll need to make such dreams come true.
Evaluate your expenses
After you've spent some time trying
to create a mental picture of your retirement years, take a moment to consider
what new expenses you'll incur. Although your mortgage may be paid off
by the time you retire and any work-related expenses will disappear, others
may increase:
-
Travel expenses
-
Medical expenses
-
Doctor's visits, prescription and non-prescription
drugs
-
Utilities
-
Water and electric bills typically rise
when you are at home more regularly
Next, you'll want to brainstorm possible
ways you can cut back on expenses. Perhaps you will become a one-car family
or reduce your entertainment allowance. Stopping to carefully examine your
projected expenses can go a long way in correctly assessing your retirement
needs.
Factor in the rate of inflation
You'll also need to take into account
the impact of inflation on your retirement savings. To be safe, it's a
good idea to plan for a 4 percent rate of inflation per year. This means
that your cost of living will increase every year throughout your retirement;
therefore, it's imperative to choose an investment strategy that will outpace
inflation.
Consider your sources of income
You can assume that you'll have two
- and possibly up to three or four - primary sources of income during your
retirement years: EPF accounts, wages from part-time employment during
retirement years, and your personal investment portfolio. In most cases,
your personal investments will need to fund the majority of your retirement,
making it imperative to plan adequately. However, it is a good idea to
take into consideration all of the following potential income sources and
evaluate whether or not they apply to your specific situation.
Employees Provident Fund (EPF)
A common error people make in planning
for retirement is that they assume EPF will play a large role in their
retirement income. But in truth, funds from EPF will only make up a small
portion of your retirement income. The EPF will barely allow you to scrape
by in most cases, certainly not retire comfortably.
Part-time work
Will you be able to work part-time
during your retirement? Will you want to work part-time during your retirement?
Some retirees are successful in transforming a hobby into a part-time position,
but problems can arise with this plan that are nearly impossible to predict.
You may develop a medical condition, for example, that may make it difficult
to earn wages. Or you may need to assume the role of caregiver for a significant
other.
The bottom line is that the decision
to work part-time during retirement is one best made after you've retired;
there is simply no way to gauge whether working will complement your retirement
situation. As a result, experts generally recommend not relying on anticipated
income from part-time retirement work when sculpting a retirement plan.
Personal investment portfolio
Because this will make up the lion's
share of your retirement plan, it's crucial to begin investing for retirement
as soon as possible. It's a good guideline to invest roughly 10 percent
of your annual income a year, but don't make the mistake of waiting until
this goal is attainable before beginning to invest. Even if you have just
a few dollars a month to spare, start investing now and allow your money
to start growing.
Take the next step
What you've learned here should start
you on the road to successful retirement planning. Now, take the next step.
Use our Retirement
Planning Calculator to review your personal situation. |
