Friday, 4 October 2013

When Do You Want To Retire?

A lot of people dream of early retirement, in other words, to achieve early financial freedom. After retirement, you can do anything you want, you can even continue to work, but only do the work you like. It is essentially time freedom.

How much should we save to achieve financial freedom? Well, it depends on the quality of life you want after retire, whether it is a 5k a month or 10k a month life quality.

The idea is, we should have a consistent stream of monthly passive income after retirement.

You can get passive income from any sources: interest income from fixed deposit/unit trust/shares, copyrights of books, passive income from multi-level marketing, pension, special retirement investment scheme etc.

If you wish to have a passive income of RM6000 a month after retirement, and you choose fixed deposit with 3% interest to generate it during your retirement, then you should have a NET cash of RM2,400,000 at retirement. 

For most of us, this is astronomical numbers that is hard to achieve. To get to this numbers, you need to save at least RM4000 every month in an investment with 3% interest per annum compounded annually for 30 years (you can get RM2.32 million on this). You can use the compound interest calculator at the side to calculate.

If you start to work at age of 23, after you work and save for 30 years, you will reach 53 years old and this is not an ideal age of early retirement I guess. Furthermore, how many people can save RM4000 a month? Even by adding in EPF contribution, still it may not be easy, unless you earn more than RM10k a month, are single and have no children.

If your investment vehicle can give you consistent 6% annual interest, then you just need to save RM2,500 a month for 30 years or save RM4,000 a month for 23 years.

That's why you can't rely on fixed deposit to increase your wealth or even to preserve your wealth, as your money will be eaten by inflation. RM6,000/month 30 years later may be will be like RM2,000/month now. How much did a plate of chicken rice cost 10 years ago? How much does it cost now and how much do you think it will cost 30 years later?

Anyway, this is a case of spend only the interest income after retirement and preserve the capital. You may not want to do this but want to spend all your money during retirement and leave nothing to your offspring, perhaps you are single or you want your children to strive on their own. You can, but it is better don't as you may need to spend more than you think during retirement.

If you plan to spend all your money and leave nothing behind, then it is easier to achieve. If you are to retire at age of 45 and expect to live until age 75, and you want pocket money of RM6,000 a month during retirement, then you will need not more than RM6000 x 12 x 30 = RM2.16 million. 

Actually you need less than this figure if you put the money in fixed deposit that generate consistent interest. Perhaps you need just RM1.5 million. To accumulate RM1.5 million in 20 years, you still need to save at least RM4,500 a month in an investment vehicle with 3% annual interest.

It is obvious that you need something more than FD's 3%.

History suggests that unit trust may give you 6-8% return per annum in long term. Investing in share market gives you more than this if you do it correctly. Many companies give dividend yield of more than 6%, and also capital appreciation of more than 10% a year!

Though more troublesome, property investment can give you handsome reward if you invest in the right location. Flipping a property is like speculating in share market for short term gain. However, if you keep for longer term with rental income, then the return can be awesome.

The beauty of property investment is, you invest mostly using other people's money. For example, you buy a condo in a good location with a price of RM500,000. You borrow 90% from bank and pay 10% plus a few thousands of other fees (assume total initial investment RM60,000). 

You rent the condo out at RM2,500 a month while you pay the bank RM2,200 a month (interest 4.2% for 30 years) . The extra RM300 a month should be able to cover other expenses like condo maintenance. So, the tenant pay the house loan for you throughout the years. 

After 15 years, you may decide to sell this property. What do you think how much will this condo worth by then? Lets assume that it is worth RM1 million 15 years later. At that time, your bank loan will have about RM200k remaining. After paying your outstanding loan, various fees and deduct the initial investment of RM60k, you will have a profit of more than RM700k! So from RM60k to RM700k in 15 years, which is about 18% compounded annual growth. This does not include the rise in BLR and rental though.

Of course many experienced share market investors may be able to achieve CAGR of 18% with ease, but consistently for 15 years may be a challenge. Anyway, if you can get a good commercial property then it's even better, as it will generate more monthly positive rental income and its value will appreciate faster.

If you don't sell your condo and are able to settle your loan before retirement, then you will enjoy the full rental income as your pocket money during retirement, which I think is easily RM4,000 a month at that time, which is 67% of your dream monthly passive income of RM6,000. What if you own 2, 3 or even more properties?

The magic word in property investment is always location.

However, there are quite a lot of hassles in property investment and some people may not like it. Well, there are still many other ways of investment. You just need to choose the best way that suit you.

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