Retirement is certainly not a subject that we wake up thinking of every day. So, how do you start planning for your retirement? Retirement planning begins when one asks the question how much is needed for retirement. When calculating how much retirement savings we need, you also have to take into account these three (3) big retirement concerns – adequacy, sufficiency and sustainability.
Adequacy of monthly replacement income
Firstly, we certainly need to ask how much is considered adequate as monthly income for retirement. Accordingly to the World Bank, the simple rule of thumb is to ensure that you have a 2/3 replacement income ratio of your last drawn salary in order to continue enjoying your current standard of living at retirement.
How much a person spends for their retirement, whether it is RM2,000 or RM20,000, really depends on their pre-retirement lifestyle, health situation and family dependents. Without sufficiently replacing their earned income when they retire, retirees may have to cut back on their living standards or fall into the dependency of others to take care of them especially if they are no longer fit to work to earn their own income.
Sufficiency to last entire retirement period
Secondly, people need to ensure that their income is sufficient to last the whole duration of their retirement years. The key issue here is outliving your retirement funds, which would leave people very vulnerable as they would run out of income to support themselves when they are aged.
Malaysians are living longer and longer. The current average life expectancy of Malaysians is about 75 years and this number is expected to increase to beyond 80 in a few years to come if medical marvels continue to keep us healthy. This means, Malaysians on average would have to allocate enough savings to sustain 20 to 30 years of their retirement life so they do not have to outlive their savings, with the current retirement at age 60.
Sustainability to weather inflation
Finally, people need to plan to have their retirement income inflation adjusted. Inflation has a subtle and quiet way of increasing cost of living and eroding purchasing power. As such, we need to make sure our money works hard for us by ensuring the growth rate of our retirement savings and investments is higher than that of inflation, otherwise inflation will erode the standard and quality of our retirement life over time.
We therefore have to address the retirement income issues now while we are earning our current income. It really is a question of balancing current consumption with saving for our future retirement spending. We obviously are more focused on current living but the fact is if we want to live our retirement the way we want it, we will have to address the issues of adequate, sufficient and sustainable retirement income. If not, you may be living it to chance and hope that things will turn out alright when you retire. You certainly would not want surprises at your retirement.
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