How Much Money Do You Need To Retire?

I often come across queries from people who want to know how much money they need to have saved up to retire. It’s a common question and one that is hard to answer.

Typically, I will ask them, ‘How much do you want to spend for retirement?’. In other words, it’s how much money one will need to live the lifestyle one envisages after one retires. This, of course, depends on the kind of lifestyle that one wants to live and can vary greatly depending on individual preferences.

For instance, some may need around RM200,000 yearly to maintain their desired retirement lifestyle. This money will cover basic necessities and allow them to enjoy some luxuries, like holidays. In addition, I have a select few who require an annual budget of RM400,000-500,000 – a significant amount of money to enjoy the retirement lifestyle they want.

Generally speaking, the savings needed for retirement varies significantly depending on factors such as cost of living, anticipated income sources during retirement, desired level of comfort and security, and other unaccounted-for expenses. Planning your retirement budget carefully is essential so you can enjoy your golden years without financial worry.

How much should I save? 

When saving for retirement, the amount you need to save up depends on various factors, such as your age, current financial situation, and future retirement goals. Generally speaking, it is wise to start saving early and regularly put aside money into a savings account or retirement fund to secure a comfortable retirement.

For example, Mr A, age 40, employed with a net annual income of RM120,000 per year, would like to maintain his lifestyle when he retires at 60. His yearly expenses are RM80,000 per year, and to be prudent, he would like to plan until he is 90 years old. He plans to invest a portion of his income into a retirement fund. He opts for medium-risk investments to earn a steady passive income stream to maintain his desired lifestyle upon retirement.

Other data:

• Inflation: 4.5%
• Current Portfolio return: 5%
• Total EPF and retirement savings: RM500,000

To summarise the calculation, he needs RM5.05 Million to retire at age 60, and based on today’s value, it will be RM1.9 Million. After minus his EPF and retirement savings contribution and growth, the retirement savings gap is RM1.1 million, which may sound like a lot but can be achieved with a little bit of planning and strategic investments over time.

After risk assessment, he can take up more risk (moderately aggressive), and 7% is a comfortable level to aim for to maximize returns without taking on too much of a risk burden.

To cover the shortfall, Mr. A has three options when it comes to investment:

• Option A: Lump sum investment now: $345,000
• Option B: Yearly investment required: $97,000
• Option C: Monthly Investment required: $8,500

Since Mr A can only commit to investing RM30,000 per year, which is 1/3 of the desired yearly amount, he cannot fulfil the gap completely. However, with consistent annual investment, he can reduce the gap over time and steadily move closer to his goal. In his case, Mr A can consider delaying his retirement, reducing his retirement lifestyle expenses, increasing his income or increasing his investment yearly. A yearly review is critical to Mr A as this will help him know if he is on the right track and make adjustments accordingly, so he can rest assured that he’s doing everything possible to ensure he has enough funds when it comes time for retirement.

What’s next? 

Planning for your retirement can be a daunting task. Fortunately, with the help of a few simple calculations, you can get an idea of how much you need to save for your retirement. It’s always a good idea to chat with your financial planner before making any significant decisions regarding your money. They can provide valuable insight and help you create a plan to ensure you reach your financial goals in the most effective and efficient way possible.