What is your Retirement Number?

I may not be there yet, but I’m closer than I was yesterday.

So you are thinking of retirement? What is your retirement number?Everyone loves to retire as soon as possible no matter how young you are. I enjoy the freedom of time and go shopping while everyone else is still working in the office.

No traffic jams on your way to the shopping mall, no long queues while waiting to buy your cinema tickets. How I wish I can retire young and enjoy all the freedom I have.

What is the magic number you should keep aside in your nest eggs? The number that you are comfortable with and say F- you money forever!

Financial advisors, insurance companies, and even banks make complicated formulas for you. They hope to frighten you with inflation figures, the cost of health care, and longevity of your life.

What is your retirement number?

Pick a small figure might turn you to be a beggar when you are 80. Aiming a higher number might make your dream of retirement like a galaxy far far away.

500k? 1 million? 2 million? For Malaysians and Singaporeans, we all do not know the exact figure. There are too many variables in the calculation,

• What kind of lifestyle do you want?
• What is the future inflation?
• How many years can you live after retirement? ( only God knows this)
• How much money do you want to leave behind?
• How many times do you want to travel overseas per year? ( Singaporeans would certainly do better than us due to their BIG SGD)
• Are you still planning to drive a big-ass-gas-consuming car after retirement?
• How about housing post retirement? A small apartment in Penang Island, Malaysia or a grandiose three-storey bungalow near Orchid Road in Singapore?

Too many variables, hard to calculate. Your financial adviser might be charging you a few thousand bucks to work the figure out. I will tell you a simple calculation later.

For the Americans, life seems a bit easy for them thank to The Trinity Study! But mind you that the caveat to this study is it is based on the US historical stock performance. It does not necessarily apply to Malaysian or Asian context.

The Trinity Study

In the 1990’s, a key retirement planning study was published by three Professors from Trinity University, often referred to as The Trinity Study.

The study needs to answer this million-dollar question- ” How much do you need in your portfolio so that you would not finish using up all your money after 30 years post-retirement?“

The initial study covers the period from 1926 till the end of 1995 but was later expanded to include data till 2009. Various scenarios happened during these periods- World war, dot-com crisis, great depression in 1929, global financial crisis etc,

The conclusion is,

With a portfolio of at least 50% stock, if you only plan to spend 4% of your portfolio value every year, with a high degree of confidence, you would not use up your money after 30 years.

This is the famous 4% rule in FIRE ( financial independence, retire early) community. In other words, build a portfolio of 25x your target annual spend and you will be happily ever after retirement! Very high chances your money will last more than 30 years if you only draw out 4% per year.

The Trinity Study Essentials

By looking at the table above, you would notice that the are various combinations of stocks/bonds portfolio. If you are looking at 75% stock/25% bonds combination, the success rate for your portfolio to last you 15, 20,25 and 30 years would be 100% if you only withdraw 3 or 4 % per year from your egg nest every year.

However, by withdrawing 5% per year from your portfolio, the success rate will drop to 82% for the 30 year period meaning 16% of chances you might use up your money after 30 years post-retirement!

If you need a USD 40000 per annum lifestyle after retirement, keep a USD 1 million portfolio. If you prefer to live like a king with USD80000 per annum, keep aside a USD 2 million portfolio.

What Shall I do?

Calculate your annual expenditure. I would say leave behind your house mortgage( you have to settle your housing loan before retirement!) and see how much you spend per year.

By looking at previous EPF yearly dividend rate, Malaysians are getting at least 5% dividend per year. To make a conservative assumption, if we only get 4% dividend in future , you need to have MYR1 million in your EPF account if you want to retire with a MYR40K annual expenditure.

For me, to mitigate our risk as Malaysians in the future, I would suggest fellow Malaysians keep a USD portfolio that eventually would give them the other half money they need after retirement.

Let make is simple, if your need MYR40000 per annum after retirement,

1) You need MYR 500K in your EPF to get MYR20000 per annum ( conservative calculation of 4% dividend by EPF),

2) You need another USD portfolio that you can withdraw 4% per year safely to cover the shortfall ( another MYR20000 which is USD4651 per year, based on the exchange rate of USD 1 to MYR4.3), therefore you need a USD4651x25= USD 116K portfolio)

Why a USD portfolio?

You would never know how our currency is going in future. For me, diversify our money into another currency such as USD or SGD is crucial because of our weak currency.

The Trinity Study is based on USD , the US stock market ,and bond historical performance, if you want to believe in the study and the 4% Golden rule, you have to create a USD portfolio!

Conclusion

Thanks to the The Trinity Study, at least we have some ideas how much we should be saving for our retirement. Looking at the 4% safe withdrawal rate, we know our money at least can last for 30 years by putting in the correct stocks/bonds combination.

As a Malaysian who is holding a weak currency, putting other half of your nest eggs in another strong currency might be a wise choice!

Happy investing!