“I’m never going to be able to retire.”
Are you guilty of mumbling this to yourself? Well, you’re not alone. Most Malaysians can’t afford to retire because they don’t have enough savings.
According to Jomo Kwame Sundaram (he was appointed by Prime Minister Tun Dr Mahathir Mohamad as a member of his Council of Elders on 12 May 2018), while life expectancy of Malaysians is on the rise, most people do not have enough savings to retire comfortably. He also cited statistics from the Employees Provident Fund (EPF), whereby only 18% of members have reached the targeted minimum savings (RM 228,000 by age of 55) set by the EPF board. He said, “Low (EPF) investment returns and withdrawals permitted – for housing, health and education – imply even less for retirement.”
In short, if you want to retire early, you’re going to have to start saving early. That part’s clear. The tricky part is actually establishing the habits that will help you reach your goal.
Luckily, a handful of everyday people who have reached financial independence at a young age have shared their top tips to help you try to do the same.
Here are six tested and helpful habits to establish in your 20s if you want to settle down before 40.
1. Track your expenses
You have to know what you are spending before you can plan your retirement budget. Many early retirees started their journey to financial independence by analyzing their spending habits and figuring out exactly how much they need to retire comfortably.
2. Set clear and specific retirement goals
If you’ve set a target date, you’re on the right track to retiring early. You’ll also want to make a retirement budget, which will help you figure out exactly how big your portfolio needs to be to last through your golden years.
Many early retirees use the “four per cent rule” — the formula some say can help you figure out the amount you can withdraw from your retirement savings each year without running out — to help them determine their magic number.
For example, you retire with RM 700,000 in your portfolio. In your first year of retirement, you withdraw RM 28,000. (RM 700,000 x 0.04 = RM 28,000.) The following year you withdraw the same amount, adjusted for inflation. Assuming 3 percent inflation, you should withdraw RM 28,840. (RM 28,000 x 1.03 = RM 28,840.)
The RM 28,840 figure might be more than 4 percent of your remaining portfolio, depending on how the markets fluctuated during your first year of retirement. Don’t worry about that — you only need to calculate 4 percent once.
3. Pay yourself first
Once you’ve established a plan, you can focus on execution, which all starts with paying yourself first — meaning that you consistently send a chunk of your income to a tax-advantaged retirement account. The earlier you want to retire, the greater the percentage should be.
Pro tip: Automate. If you have a certain percentage of your paycheck automatically sent straight to your savings, retirement or investment account, you’ll never even see that money and won’t be tempted to spend it.
4. Save More Than You Thought You Ever Could
If you plan to retire in 40 years, you can probably get away with saving 10% or 15% of your income every year. But if you plan to retire in 15 or 20 years, you have to up your game. 30%, 40% or even 50% will be more likely.
You shouldn’t allow yourself to be limited by employer plan contribution limits either. Contribute to a Private Retirement Scheme (PRS) if you can qualify. Save money outside of your retirement plans. Being self-employed, you can also choose from a wide range of endowment plans that coincide with your retirement, offered by banks and insurance companies.
5. Don’t Buy a House That Will Own You
Have you ever heard of the term house poor? That describes the condition of living in a beautiful house, but one that costs so much that it leaves you very little money to do anything else. Being house poor is not a positive state of existence when you’re planning for early retirement.
Not only is your house a long-term expense that will have a major impact on your cash flow, but it is also the kind of purchase that can set the spending tone in your life. For example, a higher end home will require more costly maintenance, more expensive furniture, typically higher utilities, and higher maintenance costs, particularly in regard to landscaping.
When it comes to housing and early retirement plans, you’ve got to be guided by the less is more doctrine, as in less house result in more savings.
6. Maximise your income
If you don’t believe that you will be able to achieve your retirement portfolio number by the time you will retire, you may need to increase your income. But if you do so, make sure that 100% of the extra income actually goes and retirement savings.
There are several possibilities here. You can work to get a better paying position, or you can take on a part-time job. Alternatively, you can also set aside business (e-commerce is a fantastic option), or simply take side work based on any special skills that you have.
You don’t have to be locked into one method either. You can work a part-time job for a while, run a side business for a time, then do side jobs. If you’re not sure how to get started, here is a list of skills you can make money with.