I am so glad to receive an email from a young reader, Sam ( not his real name):
Hello,I am glad to find a financial blog by Malaysian. I would love to ask advice from you regarding my financial planning.
I am now 25 year old student but I plan to start investing next year after I graduate. I plan to use mutual fund as my financial vehicle. I plan to invest at least RM1,000 per month in fund and I plan to retire within 5 to 15 years. Can you advice me roughly what fund portfolio should I have? my risk tolerance is moderate. Is there any possible ways for me to reach my goal quickly and more effectively?
Thank you.
In order to give him more accurate suggestion, I need more information. This is the email I sent to Sam:
Regarding your inquiry, I need to have more information to give proper advice:1. What’s your aim on retirement? Example, having RM5,000/month passive income
2. How do you plan to save RM1000/month? It is not easy to do that especially for a fresh grad. I would love to hear your story.
I am so surprised that Sam actually has all the answers already. He has a very clear goal and also a plan. Let’s see how he plans for his retirement. This is taken from his email:
For now I am studying Engineering in Australia under parents’ sponsorship.
So far after some salary from internship and persistant money saving, I predict when I graduate, in somewhere september 2008, I will have a pool of roughly around RM85k. I predict my final $$$ will be between 60k to 100k RM in my bank.
I would put roughly 80k RM of this money into fund, most likely Public Mutual. One reason is I checked most mutual fund companies offer similar rate everywhere, like 5% load, 1,5% management fees. Sheessh, not much choice in Malaysia. That’s for my initial rate.
I would be 26 year old when I graduate. I will adopt max income, min expenses strategy for my first 5 years of working. If I am to work in Malaysia, I will pick a company that is willing to pay me RM4k a month, which I doubt I will get it due to poor appreciation of Human Resource in Malaysia. So I have been planning to work oversea for about 2 years to gain experience, contacts and also high income (possibly over RM10k if I work in Europe or Dubai).
So for the first 2 years, the income will support my investment, between 1k to 2k per month. I think it should be OK, dunno why people invest very little as RM100 per month only.After having enough experience oversea, I think I will be able to find a job with good salary when I come back to Malaysia to cover my investment input.
My plan of retirement is having passive income of at least RM4k per month, or having at least 0.5 million in my portfolio, either one of them that has higher value. The time frame for such goal is within 5 to 15 years. I hope it is possible with my initial 80k RM capital and bullish trend recently.
I plan to put my bet in mutual fund, with moderate risk (for now)The first 2 years working oversea will be hard for me to monitor the situation. I plan to have the portfolio of 90% in balanced fund and 10% Bond fund while i am oversea, and when I come back to Malaysia I plan to have portfolio of 10% bond, 50% balanced and 40% equity. I hope I am not too conservative
I am expecting 15% growth per year at least (my conservative expectation) and I think the goal will reach faster if it is 25% to 30% return per year.
I plan to be a persistant dollar cost averaging investor, planting money every one of two month consistently into my fund.
I plan to put my money into mayban account because it has online banking, making it easier to manage my $.
For educating myself, I have bought some good books to read. For personal financial planning, I bought the book Your Money or Your Life and Wealth Odyssey. They helped me to manage my relationship with money, by saving more and spending less.
Then I bought All About Mutual Funds, to learn about basics of MF and I might buy The Morning Star Guide to Mutual Fund, to learn some effective strategies in fund.
I also asked my parents to order monthly Personal Money to gain info about the fund news.
Thanks a lot for helping and sharing
Retirement Plan
Before we do any calculation, let’s get a clear picture of his retirement journey, as shown in Figure 1
Figure 1: Illustration of Sam’s Retirement Plan
From his email, we know the following information:
1. He will have at least RM80,000 net worth to start with at age 26
2. He will continue to invest at least RM1,000 per month starting from age 26.
3. Expected return is 15% per annum.
4. His retirement goal is RM500,000 or passive income RM4,000/month. In this case, I will use RM500,000 as the main goal because for 15% return, RM500,000 capital will give him RM75,000/year, or RM6250/month which is more than RM4,000. This is a more difficult task compare to RM4,000/month passive income.
Now, what we have to do is to calculate the value X = the retirement age, if all goes well as planned. Use this simple saving calculator.
Key in the following data as shown in Figure 2.
Figure 2: Simple Saving Calculator data entry page
Here is the result:
Figure 3: Saving schedule
Sam will reach his retirement fund goal at year 8th. He will be 34 years old at that time.
Result: Retirement age, X = 26+8 = 34 years old, which is also within the time frame he set (5-15 years).
How about Inflation?
We all know that inflation will cause money depreciation. After 8 years time, is the RM6250/month equivalent to RM4,000/month purchasing power now? Let’s do some calculation, using this Financial calculator:
Figure 4: Financial calculator used to calculate the annual rate.
Input the information as shown in Figure 4, except the interest rate per period, and press “IR”.
The result is 5.74%. This means that even if the inflation rate is high, as long as it is lower than 5.73% per annum, the purchasing power of RM6250 after 8 years time is still higher than the current RM4,000.
Is the passive income inflation adjusted?
In this discussion, it will be a little bit confusing. But I wish that I can give a very simple and clear explanation.
When Sam retires at age 34, he will have RM6250/month to spend. Meanwhile, his capital of RM500,000 is intact and preserved. But if he keep spending RM6250/month, his RM500,000 will still remain the same RM500,000, forever. At the same time, inflation keep depreciating his money. He will soon realize that his RM6250/month is not adequate anymore.
In this case, he can’t practically spend all his passive income. He should leave a certain portion of the return, and put it back into the capital and keep accumulating it to hedge against inflation. If you study financial planning courses, you will know that there is a formula to calculate the Inflation Adjusted Rate (IAR) :
Inflation Adjusted Rate (IAR): The periodic
rate of return on an investment after adjustment for inflation. Formula: I.A.R = (1+
nominal interest rate) / (1 + inflation rate) -1. (Multiply x 100 to convert to a
percentage rate) A rate used to express future sums in constant (non-inflated) dollars.
Permits the measurement of the buying power of future dollars as measured in today’s
dollars.
In order not to confuse you in this matter, just imagine Sam has to deduct the inflation portion from his returns before he can spend it. Let’s say inflation is 3%, for the return of 15%, we can simply deduct 15-3 = 12%, which Sam can treat it as the usable passive income.
The actual passive income Sam will have at age 34 is RM500,000 x 12% = RM60,000 p.a. = RM5,000/month.
After that, his principle retirement fund of RM500k will grow because he only spend 12% of the return and 3% is injected back into as capital investment. During the next year, the 12% return will give Sam more than RM5,000/month to spend, which will hedge against inflation.
A Plan is Nothing without Action!
Sam’s plan can be implemented. If he does it correctly with the highest commitment, it will work. I think the main challenges are:
- Will he be discipline and consistent to really spend only the minimum and save the maximum?
- How to constantly get a return of 15% per year? It’ll require another post to discuss this matter. I learn that Warren Buffett’s investment returns is about 25% p.a.
- Can he set aside all the other family commitment – getting married, having children, home purchase, car purchase etc. – that might be obstacles during his accumulation period?
Do you think Sam can make it? After 8 years time, I wish that I can write a follow up post about Sam’s financial situation.
[poll=12]
We would like to hear your opinion in the comment.
More articles on retirement:
Only 5% Ready for Retirement in Malaysia
$10 to $1 million: How long does it take?
Technorati Tags: retirement, fresh graduate, retirement planning, financial freedom
{ 22 comments… read them below or add one }
Thanks for sharing! This post is worth treating you a cup of coffee
I think the analysis is very well done. The calculator is priceless! Thanks for sharing that
Personally I think Sam’s prediction and calculation is rather conservative. It seems like he chooses “the worst case scenario” figures to predict his financial journey. He places his goal high up with modest input. Most likely 8 years to 10 years is the longest possible time to reach his goal. I think if the figures are raised slightly optimistic, I believe 8 years is a realistic time frame.
Most likely Sam has to sacrifice a bit when he is young. No car / No house. When he gets older and more stable financially, he can buy those stuffs. This is the hard choice he has to make.
If he learns more about yielding more profit from his investment, and if the market is strong, this will help him reach the goal even faster.
I think when he reaches his goal, he might have to re-plan his portfolio so that a part of his investment will continue to grow.
Overall I think Sam needs to learn more about the technical part of investing, like what you mentioned about over 20% per annum. He needs to be disciplined and consistent as well.
Your Money or Your Life is a good book on finding higher income and keeping expenses low. I like that book.
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hmmm… However, if we consider taxes, 5% load, 1.5% management fees.
There would be some set backs.
I think taxes on Mutual Fund profit is something complicated.
Bravo to Sam and KCLau !!
The road to financial freedom is paved by determination and discipline.
One thing to point out about the investment return,
that the average return for mutual fund is merely about 10~12% over long-term records, 15% is kinda optimistic to me.
(to get a better conservative view of fund return, we could ask the insurance agent about the projected return of ILP funds, they do give achievable rate by based on how ur combination on equity, balanced and bond funds)
Regarding the magic 25% p.a record of Buffet, we hav to understand that he is nobody like us, he invest directly in stocks, private firms, go through period of time when bonds are offered in double digit return…. plenty of free float money channel in every days and desperately thinking to optimizing the efficiency of the $$$. we dont, do we? unless we invest in stocks and not gamble on it.
since Sam determine to achieve his financial goal through unit trust and start investing with such lump sum of money. I encourage him to learn switching funds along his journey. once he become Mutual Gold member (>rm100k invest), the switching fee is waived. so learning to use it wisely, make the $$$ circle and work harder within the mutual fund system.
once Sam reach that day, he hav to plan another strategy to manage his asset then. equity funds are heavily affect by market fluctuation, sam might need to stack up another few $$ as buffer to survive through market downturn in future. those emergency fund should be enough for at least one year expense and wholly kept in safer place like bond funds. (or better deal, try enhanced bond then switch to select bond/money market when the rainy days come)
best wish to all
@ Anonymous
we can see that you are a very experienced investor. Thanks for you kind input.
I am grateful to learn something new from anonymous and KCLau
What would your recommendation be to acheive a 10-12%p.a. and 15%p.a. return?
All plan no action means nothing, I totally agree. Personally, I have simple questions that can be put to test right away. When coming to financial matters, do you always live below your mean? Were you known to your peers or friends as someone who do not know how to enjoy the better part of life? Were you publicly looked down most of the time because you have stuffs either long time expired but still usable or out of fashion radar? Do you always someone who think how you should decrease your expenditure while increase your saving ratio?
If you are that sort of person, give yourself a pat on the back. Attitude, patience, humility and mental strengths are considered the necesary tool sets instead of mere investment knowledge.
There’s no point knowing so much about investment matters while spluring long term hard gain for short term gratification.
Coming back to the question, whether someone can retire in 8 years depend on how much he/she willing to sacrifice all good things in life for a better tomorrow? Then again, there’s no point achieving the goal and later spend like there’s no tomorrow. BTW, 15% return seems all fairy tale to me. Even there’s one, time factor is still another leverage but defintiely not 8 years. OKOK, there are some investment portfolio which achieve so but it’s almost non-existent for low-risk-high-return category. Take note high risk does mean, someone could lose all the golden eggs with the throw-in basket.
In my financial dictionary, if you have a cent more to spend, you have a cent less to save. Financial matters to me is always zero sum gain. Everyone talks about high investment return but it means nothing when the money is consumed rather than compounded.
There’s no point talking about early retirement while we do not plan to change our immediate living style.
The Millionares Next Door book, summed it aptly by saying millionaries studied in US context live frugally or simply below someone’s mean.
KCLau presents How A Fresh Graduate Plan to Retire in 8 years posted at KCLau’s Money Tips, saying, “A committed fresh graduate tells his story about his desire to plan for retirement as soon as possible.â€
4k per month is not enuf for u after 10 years, how about ur house loan and other loans?
loan is a matter of choice. If Sam doesn’t get into any debt, I can’t see any problem why 4k is not enough
a very interesting question and answer since i’m also a fresh graduate planning to retire young.
although sam has planned rigidly on his financial life, he didn’t seem to include other expenses like what kclau has stated: marriage, car, house, etc.
unless sam plans to retire at 40 which is a much more practical retirement age for his portfolio. or unless there are other alternative investment that can help him to achieve his target amount at the same time paying off his housing, car loan and support his family [if he has them].
I am very-very sure Sam will achive his goals less than 8 years. I’ve went through same situation as per what Sam planning for.
The use of monthly compounding with an annual rate of 15% is flawed. This assumes that additional money can be reinvested at 15% which is not the case. Normally, annual rate of return is used for annual compounding only. You need to convert the interest rate to a monthly compounding rate.
i don’t think that he can do it in 8th years time.This is obviously not an easy task.there are still a lot of thing he has miss on the plan,like others commitments,insurance and properties.this is the main obstacle that may pull him down.however,if he is manage to follow the plan with a super strong willpower, this should be achievable.there is one thing he has to take into the consideration,that is the external factor like retrenchment.even though this is something we can not expected,i think he should get ready for this issue as well.GOOD LUCK…..SAM
@Doug,
As you said, I think that Sam needs extraordinary “Willpower”.
Let’s say you can really retire in 8 years time with loads of money
After 5 years without working, your brain’ll become rusty and all your money will go to waste
Get a life dude!
I don’t think Sam can make it as 15 % per year is too high and not realistic. However, he has a good attitude we all should learn. We all should save a very big portion of our income now if we want to live comfortably in the future. This principle is called delay gratification which is the key to financial freedom.
@ limsan
Life is more than the work in your job.
D determination is good but in my opinion, why nt invest money in true business which require financial expertise also. From the money that we earned from certain business, we can invest much more steadily in stock, unit trust and so on. Wouldt it better than just be rather stressful to save Rm1k from estimated salary Rm4K.
Sorry buddy, but you don’t make enough money to retire at age 30
Unless, you want to live like a popper! How did your investments treat you last year?
Shogun
Yo sam… it great thinking.. but one think before u do all the planning on your none existing money.. i advise u to focus on your current habit on money now!
How well u manage your money now. Because when u start manage ur money then only u can have more money not vice versa bro! I recommend u to read this book T.Harv Eker Secret of Millionaire Mind Set.
A 15% growth in your investment ? Some of the best dividend stocks in KLSE do not give such return….you must be joking !
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