A Guide to Retirement Planning for Beginners

Are you in your twenties, spending your monthly pay cheques on caffeine in a cup from trendy cafes around the city? Or are you in your mid-thirties who enjoy exploring the world and picking up new interests? Perhaps you are at an age where your career is at the end of its timeline, and retirement is just around the corner. Regardless of your age, it’s never too early nor too late to think and plan your retirement.

As the saying goes, “Hope for the best, plan for the worst,” planning your retirement will allow you to be well prepared for any circumstances that may occur in the future. A simple explanation of why you must plan ahead is essentially to prevent depletion of fund in your retirement.?

For those who are part of the pension schemes are encouraged not to get too comfortable as the pension received might not be sufficient if you wish to tick off your bucket list during retirement or perhaps if you factor in inflation or recession that may occur. A glimpse into the future might make you realise that you need to save up more than you think. For that reason, planning for retirement is something you need to take seriously.

When should you start saving for retirement?

You can start saving as early as you can at any age. There is no right answer as to when you should start. Nonetheless, ideally, you should start saving in your 20s or as soon as you receive your first pay cheque. The reason why you should start saving early is that the sooner you save, the more money you will grow as time goes by. Starting early will give you a head start on your retirement saving as well as other savings that you have in plan.

For instance, if you plan to retire at the age of 60 and you start saving at the age of 20, then you would have 40 years to save. Even if you start at the age of 30, you will have 30 years to save. This shows that you can start saving up at any age. Though it is true that you could start saving your money at a later point in life, the downside is that you may have a lot of catching up to do, which is why beginning early is advisable. According to?Agensi Kaunseling dan Pengurusan Kredit?(AKPK), Malaysians are recommended to save at least 10% of their monthly income for savings[1]. A popular rule, which is the 50-30-20 budget rule, recommends setting aside 20% for savings, 30% for wants, and 50% for needs[2].?Having said that, it might be reasonable to conclude that the rule of thumb is from 10% to 20%, depending on your goals. Regardless, if you feel that the recommended split is overwhelming for you to follow or that you believe you could do more, you may construct your own personal rule that is tailored to your own financial situation.

Determine your retirement goals

As you begin to think about retirement, it is important that you identify your retirement goals when planning it. For many people, their retirement goals might be moving to a new home in a different location that requires less maintenance or purchasing a second house in a desirable location, while others might want to prioritise more on wellness to maximise their health. As these may be the retirement goals for others, maybe for you, you would want to discover new interests or hobbies because retirement grants you more free time for you to start delving into your passion that you might have been contemplating on doing when you were working.?[i]

As you list down your retirement goals, it is also important to consider the factors that might affect those goals. For instance, your central life goal might be to start a family by bringing children into your life. It is well known that having children will require significant amount of funds since raising children is not inexpensive as every parent would want to give the best for them to ensure they are well-raised and well-educated. For that reason, the kind of family you want to have will play a factor in your retirement planning.?Therefore, it is worth thinking about your goals and the factors affecting those goals for retirement.??

Determine retirement spending needs

The next thing you need to do is determine your retirement spending needs, which are your daily expenses and short-term spending. To start, you will need to have realistic expectations about your post-retirement spending habits, which will help you make out how much money you should be putting away.?The things you need to consider are your groceries spending, petrol, car and house loans, and the list goes on during retirement. If you don’t start a budget on this, you might find yourself in a difficult situation financially.

One of the common mistakes retirees make is underestimating how much they would spend in retirement to have a comfortable lifestyle. More often than not, they tend to overspend due to no prior and proper planning, or they do not know how to plan.?The majority of people think their yearly expenditure will only be between 70% and 80% of what it was before retirement. An assumption such as this can be worrisome, especially when you have loans to pay off or unforeseen medical expenses.

How much should you save for retirement?

There is no fixed rule about how much money you need to save for retirement. In fact, it all depends on what your goals are at the end of the day. Do you want a lavish retirement or a simple one? You will only need to crunch the number to know how much you need once you have identified at what age you plan to retire, your retirement needs and wants (goals) and also take note of your annual income. As you calculate all the possible expenses, you will also need to consider the inflation on the prices of goods and services for the years to come.

Although there is no rule, with longer lifespans, inflation and rising healthcare cost, it was mentioned in an article by Star on EPF projection that a minimum of RM1 million should be set aside to retire comfortably today for 20 years[3]. When calculating, you might be surprised that you could spend RM139 per day, and that value will erode over time.????

Other retirement experts recommended following the 4% rule by which retirees are suggested to only spend no more than 4% of their retirement savings each year in order to guarantee a good retirement.?Since every person's position is unique, it is worthwhile to sit down and determine the appropriate retirement savings for your individual circumstances.[ii]

?To get you started, here are some things you should factor into your calculations:

●?????Housing costs, including rent or a mortgage, heating, water, and maintenance.

●?????Health-care costs.

●?????Day-to-day living, such as food, clothing, transportation.

●?????Entertainment, including restaurants, movies, plays.

●?????Travel, including flights, hotels, petrol if driving.

●?????Possible life insurance.[4]

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The bottom line is that you should take your time to plan your retirement by factoring in retirement age, lifestyle, inflation and others. Nonetheless, with all that being said, it does not mean that you cannot have fun with your money now because you can but remember to save up for your future self. Start planning today!

[1]?https://www.akpk.org.my/ms/financial-advisory-what-we-offer

[2]?https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp

[3]?https://www.thestar.com.my/news/nation/2022/09/23/rm1mil-needed-for-retirement

[4]?https://www.cnbc.com/guide/retirement-planning/#how-much-do-you-need-to-save-for-retirement

[i]?https://money.usnews.com/money/retirement/aging/articles/common-retirement-goals

[ii]?https://www.investopedia.com/articles/retirement/11/5-steps-to-retirement-plan.asp