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. hope to hear from 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
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
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.
We would like to hear your opinion in the comment.