33. Finances 101: 10 Perspectives - From my point of view. 7. Five Perspectives: Financial Goals. Go
I have been looking at my core values in the past 5 weeks, values I held as a foundation to everything I do, which includes finances.
This week, and the next 4 weeks, I'll be looking at the main financial goals I set for myself in order to attain a well balanced portfolio in the finances area. They are not achieved yet, but I work on them as I go along.
The first goal I set for myself, I would like to call: Preparing for the future.
People used to say, and still say I believe, set aside 10% of your income for a rainy day and live off the other 90%. In a simplistic sense, that’s called SAVINGS.
Assuming everything goes well in life, there will come a time when you will retire from formal employment.
The question then is, do we have enough of Savings at that point in time that we can then, comfortably retire, no need to work formally anymore, and no need to be concerned about having to pay bills etc.
Many people today, don’t set aside enough, and thus, when retirement comes, do not have enough to sustain them in a life that allows them rest. Therefore, many continue to work well into their retirement years.
While working during retirement has its benefits as well (that’s for another story), let us explore a plan that can give us enough such that we work after retirement because we want to, not because we have to.
Some people say that when you retire, you will comfortably live with half of your last drawn income. That is assuming, when you retire, you do not have any more housing loans, car loans, and any other debts owing. Also, that is assuming that if you have children, they are grown up and their tertiary education is all provided for, and that you have enough medical insurance covering yourself that the only thing you need will be your daily living expenses.
1. What are the expenses you will have when you retire? Let's list them here…
Food: breakfast lunch dinner supper etc
Regular bills: electricity, water, phone/internet, quit rent / rental, sewerage, etc
Home maintenance, car maintenance
Insurance payments: Car, home, medical, life, etc
What is the average amount you need to be able to comfortably do all those listed above?
2. How do you save today to give you the amount that you need to live from your retirement onwards?
Let's make some simple assumptions. Say your last earned salary before you retire at age 60 is RM10,000. That means you need RM5,000 per month from the age 60 until, say the average mortality age for a person of, 75 years old.
That means you need RM5,000 x 12 x 15 years = RM900,000. Adding inflation over the 15 years, you need to have RM1,000,000 at the age 60.
That will be your number to aim for.
Questions to ask yourself: With what you are doing today, can you have that amount in cash/liquid assets that ready at your 60th birthday?
3. Whatever age you are today, start now to aim for that number. Remember that this is the Savings element you need to have minus all your current day expenses, loans etc
What are some ways to achieve that number?
The simplest one could be property. Are you currently paying for an additional property that you are not living in? One which at the age 60, you would have fully paid it off, and can sell it for an estimated selling price of RM1,000,000?
If yes, you are SET!
If not, then there are a few other ways you can try to aim for that goal of RM1,000,000
4. Look at your current EPF account. As you know, you currently contribute 11% of your salary to it monthly while your employer should be contributing to it as well, approx 12% to 19% per month also.
That means, if what you have inside there today (all accounts) PLUS what you are contributing today PLUS what your employer is contributing today continues in your current employer at your current salary UNTIL you retire at age 60 can achieve RM1,000,000, then you are also SET!
If not, then you can do a few things to bring the number closer to your goal. Look at what the EPF is currently giving you as dividends.
A. If you are currently paying off a housing loan at a certain % interest, if you use a portion of your EPF to settle a portion of this loan, will your interest savings from the loan reduction be greater than what EPF is giving you? If yes, you should do that
B. Currently you are allowed to take a portion out from EPF to invest in certain Unit Trust Funds. Look for a trusted UT advisor. Are there some funds that can generate more returns over the medium term compared to what EPF is currently offering you? If yes, you may invest some in this way.
C. A and B above are some examples of how you can use the EPF funds to work harder for you.
Another way of course is to increase what you put into EPF.
The first and most obvious way is to work hard, get promotions and increments and get your monthly contributions increased, or look for a new role, position, job, employer that can give you and increase in your monthly salary.
The second way of course is to look for an employer that pays more % into the EPF for you during their monthly contributions than your current employer.
5. Next is to have a separate fund set aside purely for Retirement Income purposes.
A. You can set one up yourself and contribute regularly to it, but of course, for this to be worthwhile you have to be super disciplined and the returns from this fund should be more than what you can get from the EPF, or else you would be better off just contributing to the EPF.
Some people want to give more than what is contributed to EPF, so they either put their money in Fixed Deposit (FD) or Unit Trust (UT) or put it into their housing loan accounts to reduce the balances.
B. Another way you can use your funds in excess of your EPF contributions could be to look at Insurance Providers whom have products tailored for Retirement Income Accumulation. While there might be some service charge attached to these product types, they have the following benefits: They make you automatically pay into the funds, hence taking discipline out of the equation. They also have quite attractive rates of return. Also, they have certain forms of coverage for times when something may happen to you and you cannot afford / unable to contribute further. This are insurance products.
While the list above is not exhaustive, I hope it gives you some food for thought.... until next week...