Personal Finance

How much to save each month in Malaysia for retirement?

Here I look into the balance between living and saving for retirement. I am not advocating that people who are not saving are at fault. If your wages are too low then it could hardly work. Those are structural problems that our government could address in a million ways but ..yeah, it’s a rakyat-Jaga-rakyat season now.

After reading different theories and practices of budgeting and saving, I find the 50/30/20 rule to be the most practical. The idea is you assign 50% to fixed expenses such as housing and car, 30% on anything you like, and 20% to saving.

Personally, I like to swap 50/30. Budget 30% on fixed expenses, 50% on discretionary expenses, and 20% on saving. Why? The lower your fixed expenses are, the less financial stress you have. You can be more flexible in buying happiness, handle emergencies or save more when you don’t use up 50% of your pay for parties.

Is 20% enough for your retirement?

Using the safe 4% withdrawal rate, you need to save 25 times your annual expenses or income to retire. When you save 20% of your income, it takes approximately 41 years to save 25 times your yearly income (Income, not Expenses). Forty-one years look like a lifetime, but it matches the traditional middle-class framework of starting to work in your ’20s and retire in the ’60s. Then the social benefits and retirement fund will take care of your golden age. I believe technology, low-interest environment, and Bursa Street changed much of this but fundamentally, our government policy is still rooted in this notion.

How expenses play a role?

The calculation of 41 years of saving is based on your annual income. If you can keep your spending within 50% of your income, then you can drop the time required by half. So 20 years of working for life-long retirement, sort-of. You working and save from 25 to 45, and have a good 15 years between age 45 -60 to do your own things before retiring in 60s.

Saving for the certainty and uncertainty of life

The known is we need to save for old age or when IA takes away our job; the unknown is what will life brings tomorrow (YOLO when you can).

Life is uncertain. All your sacrifice for early retirement is meaningless if you say no to your favorite latte, and caught in an accident before FIRE is reached.

You do earn more if you are in the field of specialists. Work between age 50-60 actually pays the highest salary and provides a good opportunity to build additional wealth.

Couple these two big life factors, the optimum point of saving is actually nearer to 20-50% rather than the extreme FIRE movement of 50-90% (outliers aside).

How much should working group in Malaysia save?

If you are officially employed in Malaysia, 9-11% of your pay is deducted into EPF monthly. And your employer funds another 13-17%. Looking at this equation, theoretically, should you work from your ’20s and retire 41 years later, EPF is enough for your simple lifestyle retirement from age 61.

Why does KWSP says nearly half of the contributors have not enough savings?

  • I think the main reason this happens is the devaluation of the currency (that’s why country governance & corruption always affects us). People in their 60’s started working when USD/AUD/SGD is nearer to 1.5:1 to MYR. If food is now 1/5 of the price in MRY, their savings is enough.
  • The retirement age was 55 before they raise it up to 60, and someone who works from age 25 will only work for 30 years, that’s 1/4 short of the required saving period under the 4% withdrawal rate model.
  • If you are working odd jobs, chances are you are an inconsistent contributor (and low paying to keep up with inflation).
  • Not everyone is discipline to spend under the safe 4% withdrawal rate. But that’s not easy, with the above three factors at play.

So the 50/30/20 model is still practically applicable to us. By adding 20% take-home pay saving, you like to retire comfortably at 60 or have a bigger buffer (imagine USD1 = RM8 when you retire). If your KWSP contribution is low, saving 20% of your take-home pay is minimal.

20% is the minimal saving rate. What do you think?

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