5. HOW MUCH MONEY DO YOU NEED TO RETIRE?
25x or 33x Rule? Your lifestyle determines how much you really need for retirement
If I walk down the streets of Kuala Lumpur today, randomly ask 100 people these three simple questions:
1. How much money do you think you need to retire at age 60 (Malaysia's current retirement age)?
2. Are you worried that you might not have enough money to retire, and you might run out of money one day after retirement?
3. Do you know how to calculate exactly how much you need to retire?
What do you think the answers will be?
For question number one, most people might just simply throw me some arbitrary numbers, "Gosh, I don't know! I haven't really thought about it! RM500,000? RM1,000,000? RM3,000,000?"
For question number two, I believe the answer will be an affirmative "Yes, I am worried." Who can blame them for being worried? No one can foresee what will happen twenty to thirty years down the road with so many unpredictable unforeseen circumstances. It's very natural that they are worried.
For question number three, I believe the majority of them do not know how to calculate how much they need to retire. Even if they know, there are so many ways to calculate, which will be the most practical method then?
Honestly speaking, my answers to all three questions above would have been similar to them more than ten years ago. I was as confused and uncertain as anyone else.
How much money do you really need to retire?
But now I am grateful that I’m "on the other side of equation" after having retired early in July 2017, I can now have the opportunity to humbly share my personal experiences with you. But please take note that I’m not a certified financial adviser or planner. And I don’t claim myself to be one. I’m just an ordinary folk who has come a long way to where I’m now. And whatever I share is purely based on my own research, experience and life journeys.
Essentially, to achieve financial independence, retire early and live life, you need to have enough income to pay your living expenses for the rest of your life without having to be employed or dependent on others.
In other words, you need to be able to generate enough passive income to support your living expenses so that even if you relax at a beautiful beach in an exotic island doing practically nothing, you will still automatically receive income without your physical and time involvement.
Some of the most notable passive income sources are stock dividends, EPF dividends, bond dividends, fixed deposit interest returns, property rentals, etc.
Once you reach such status in life, you have achieved your financial independence. You can fearlessly say sayonara to your boss and retire to live a more meaningful life true to yourself.
1. Figure out how much you really need to retire
First of all, you need to figure out how much money you really need to retire to live life fully.
According to The Employees’ Provident Fund (EPF), “the basic savings that is considered sufficient to support a person's basic retirement needs for 20 years from age 55 to 75 aligned with the Malaysian life expectancy is RM228,000.” This is benchmarked against the minimum pension for public sector employees, which is RM950 per month. But in view of the escalating cost of living, longer life expectancy and higher inflation rate, this minimum basic savings amount in EPF at age 55 will be revised every three years.”
Do you think RM950 per month is enough to live comfortably in the Klang Valley, Penang or Johor Bahru upon retirement? With a plate of mixed rice easily costing RM7.00 these days, RM950 a month is definitely not enough for city living. You will probably run out of your EPF money within just a few years after retirement. Your RM228,000 will not last for 20 years.
What if you live in Perlis, Alor Setar (Kedah) or Kota Bahru (Kelantan) with much lower cost of living? A plate of mixed rice may probably cost RM4.00 there or some rural areas. Fundamentally speaking, you may have enough to support your basic retirement needs much longer. Nonetheless, I'm still a bit sceptical if RM228,000 will last for 20 years until age 75.
But of course, EPF basic savings amount of RM228,000 is purely based on EPF as a single source of income after retirement. If you have other sources of income, your money will definitely last longer after retirement.
So, how much money do you really need to retire?
1A. Multiply by 25 Rule
Financial planning needs to start as young as possible. And we don't need to unnecessarily complicate our lives. Out of all the complicated financial planning tools and methods out there, I find the Multiply by 25 Rule to be very easy to remember and simple to calculate. Even a young kid will know how to do this Multiply by 25 Rule’s simple calculation. And that's the purpose. Easy to remember, simple to calculate, anyone can do it.
What's Multiply by 25 Rule?
It's a fairly simple calculation that estimates how much money you will need in an investment portfolio in order for you to retire early. Multiply by 25 Rule is also commonly known as “Rule of 25” or “25x Rule to early retirement”.
What you need to do is to multiply your hope-for annual living expenses by 25. Multiplying by 25 assumes you'll receive a "real" return of 4 percent. This 4-percent “real” return represents a 7-percent long-term annualized gain, minus 3-percent inflation.
As the Multiply by 25 Rule name implies, all it takes is some simple math:
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Let's take a look at Malaysia's income classification according to Report of Household Income and Basic Amenities Survey 2016 jointly conducted by The Statistics Department and Khazanah Research Institute:
Class | Classification | Average | Median | Range |
Upper Class | Top 20% (T20) | RM16,088 | RM13,148 | >RM9,619 |
Middle Class | Middle 40% (M40) | RM6,502 | RM6,275 | >RM4,360 -RM9,619 |
Lower Class | Bottom 40% (B40) | RM2,848 | RM3,000 | < RM4,360 |
Even though the guide is for household income and a bit outdated, we can still use it to illustrate how Multiply by 25 Rule can be applied to each income group.
Example #1 :
Top 20% income group with average hope-for living expenses of RM16,088 a month
If you fall into this T20 top 20% income group, your average hope-for living expenses (everything it costs for you to live your life: food, travel, entertainment, hobbies, medical, dental, charity donation, etc) will be RM193,056 a year (or RM16,088 a month) after retirement.
To calculate how much you’ll need to early retirement, you can multiply RM193,056 by 25.
Multiply by 25 Rule's calculation: RM193,056 x 25 = RM4,826,400
The result shows that if you are having an upper-class (top 20%) retirement lifestyle, you will need to have at least RM4,826,400 in your investment portfolio. The moment you have RM4,826,400 in your investment portfolio, you can retire without having to work a single day for the rest of your life.
Example #2 :
Middle 40% income group with average hope-for living expenses of RM6,502 a month
If you fall into this M40 middle 40% income group, your average hope-for living expenses (everything it costs for you to live your life: food, travel, entertainment, hobbies, medical, dental, charity donation, etc) will be RM78,024 a year (or RM6,502 a month) after retirement.
To calculate how much you’ll need to early retirement, you can multiply RM78,024 by 25.
Multiply by 25 Rule's calculation: RM78,024 x 25 = RM1,950,600
The result shows that if you are having a lower-class (middle 40%) retirement lifestyle, you will need to have at least RM1,950,600 in your investment portfolio. The moment you have RM1,950,600 in your investment portfolio, you can retire without having to work a single day for the rest of your life.
Example #3 :
Bottom 40% income group with average hope-for living expenses of RM2,848 a month
If you fall into this B40 bottom 40% income group, your average hope-for living expenses (everything it costs for you to live your life: food, travel, entertainment, hobbies, medical, dental, charity donation, etc) will be RM34,176 a year (or RM2,848 a month) after retirement.
To calculate how much you’ll need to early retirement, you can multiply RM34,176 by 25.
Multiply by 25 Rule's calculation: RM34,176 x 25 = RM854,400
The result shows that if you are having a lower-class (bottom 40%) retirement lifestyle, you will need to have at least RM854,000 in your investment portfolio. The moment you have RM854,000 in your investment portfolio, you can retire without having to work a single day for the rest of your life.
I hope the above three examples based on income group in Malaysia have given you a fair view of how much you’ll need to retire based on Multiply by 25 Rule.
The simpler your lifestyle, the faster you can retire
However, please keep in mind that the investment portfolio in the Multiply by 25 Rule only includes your savings and investment accounts. For example, stocks and bonds, Employees’ Provident Fund (EPF), unit trust / mutual fund, fixed / cash deposits, etc.
The investment portfolio doesn't factor in other sources of income like property rental, pension fund, welfare benefits, etc during your retirement. If you collect property rental, that means you have extra income during retirement. But if you were to look at it from a different perspective, having property rental or pension fund or welfare benefits also mean that you need less in your investment portfolio. Logically speaking, a part of your hope-for living expenses can be covered by your property rental, pension fund, or welfare benefits.
As you can see, Multiply by 25 Rule is quite a straight forward, simple math calculation to know how much you really need to retire.
Remember, what you need might not be what others need. Don’t ever compare. To you, you may just need RM1,500,000 if you plan to withdraw RM5,000 a month as hope-for living expenses after retirement. For another, he/she might need RM3,000,000 if he/she plans to withdraw RM10,000 a month. Of course, it’s faster to accumulate RM1,500,000 than RM3,000,000. It might take you double the effort and time to have RM3,000,000 instead of RM1,500,000. Therefore, as to how much you need, it largely depends on your living lifestyle.
In short, the simpler your lifestyle is, the less you need to have in your investment portfolio, and the faster you can retire to live life fully. In fact, the secret of happiness is not found in seeking more, but in developing the capacity to enjoy less.
1B. Multiply by 33 Rule for worriers
However, if you are a worrier or a more conservative person who is still very uncertain and very worried you don't have enough money when you retire, you can then calculate using a more conservative approach.
Instead of 25x Rule, you can use 33x Rule (or Multiply by 33 Rule).
Money needed in investment portfolio = |
Hope-for annual living expenses x 33 |
33x Rule means you'll have a 'real' return of 3 percent (instead of 4 percent). The 3-percent “real” return represents a 6-percent (instead of 7-percent) long-term annualised gain minus 3 percent inflation.
Which rule should you use? 25x Rule or 33x Rule?
Of course, it's better to invest your money wisely to maximize on your return. If you can get an overall annualised return of 7% on your investment portfolio, then follow Multiply by 25 Rule.
If you feel that you are having challenges to have an overall annualised return of 7%, you can safely use the average annual EPF Employees’ Provident Fund's dividend pay-out of 6% as your overall annualised return. It’s one percent (1%) lower. This means you will apply the more conservative 33x Rule instead of 25x Rule. It also means you need to save more to enjoy the same retirement lifestyle. But at least you can sleep peacefully every night during your retirement years.
Practise frugality & start saving early
Besides maximising out on your investment returns, you can also practice frugality in your life by saving more from the day you start stepping foot in workforce in your twenties.
The earlier you start saving, the more time you will have on your side. You will be able to maximise on the effects of compound interest. You can earn interest on top of interest already earned. And as you earn interest, it gets added to your principal amount, which together earns you more interest over time. And if you start early, your investments will be able to compound over a longer time period. The earliest returns are reinvested for the longest time and therefore generate greater returns. No wonder Albert Einstein called compound interest “the eighth wonder of the world.” He further said, “He who understands it, earns it. He who doesn’t, pays it.”
Track your expenses
I also strongly recommend that you start to cultivate a habit of preparing a budget on how much you want to spend and track down every single expense. This is to ensure you don't spend beyond unknowingly. I know this is a very tedious work. Many people don't like it. But if you are determined to save more to retire early, it's something worth spending your time doing. In a long term, you shall reap the benefits of tracking your daily expenses. You know exactly what items you have overspent, which area you can cut down on your spending. You also know exactly how much you spend in a year. This will help you to determine your hope-for living expenses during retirement. Only then you can do your calculation on how much you really need to retire more accurately.
I personally have been tracking my daily expenses religiously for the past few years. I became even more diligent in tracking my expenses six months prior to my early retirement. I just wanted to make sure that I don't sacrifice my quality of living and lifestyle after retirement. I wanted to make sure that even if I no longer work, my investment portfolio will help to generate enough money to cover my living expenses.
And yes, I also continue to track my daily expenses after retirement until today. I use an expense tracking mobile app. Every time I buy something, I immediately jot down on the expense tracking app on my mobile. If I ever delay, the latest I would key in the info is the same evening before I sleep. This has given me the assurance that I don't overspend yet live a life full of quality. It helps to form a good savings habit in me.
If you carry this savings habit with you into your retirement years, you will be a prime candidate to be a minimalist without sacrificing your life quality. You can further reduce your annual expenses after retirement.
For example, you can downsize to smaller home, move back to your hometown with lower cost of living, and reduce expenses in other areas of your life. The less you need to spend, the less you need to save. And the less you need to save, the sooner you can retire!
Find out exactly how much you need to retire in Malaysian Ringgit
To help you calculate how much you need to retire according to your individual hope-for living expenses, below is a summary table as a recap of what we have talked about based on 25x Rule and 33x Rule.
I also highlight specific income groups (Top 20, Middle 40 and Bottom 40) so that you can easily identify your own category.
25x Rule and 33x Rule Summary Chart
Hope-for Monthly Living Expenses | Hope-for Annual Living Expenses | Amount Required To Retire (25x Rule) | Amount Required To Retire (33x Rule) |
RM2,500 | RM30,000 | RM750,000 | RM990,000 |
RM2,848 *B40 | RM34,176 | RM854,400 | RM1,127,808 |
RM5,000 | RM60,000 | RM1,500,000 | RM1,980,000 |
RM6,502 *M40 | RM78,024 | RM1,950,600 | RM2,574,792 |
RM7,500 | RM90,000 | RM2,250,000 | RM2,970,000 |
RM10,000 | RM120,000 | RM3,000,000 | RM3,960,000 |
RM12,500 | RM150,000 | RM3,750,000 | RM4,950,000 |
RM15,000 | RM180,000 | RM4,500,000 | RM5,940,000 |
RM16,088 *T20 | RM193,056 | RM4,826,400 | RM6,370,848 |
RM17,500 | RM210,000 | RM5,250,000 | RM6,930,000 |
RM20,000 | RM240,000 | RM6,000,000 | RM7,920,000 |
Now that you know how much money you really need to retire, I will share with you how much money you can spend after retirement in the next chapter.
SECTION 1
ABOUT FINANCIAL INDEPENDENCE
“When we allow our finances to control us, we give up many freedoms we value. The only way to gain those freedoms back is by taking control of our money.”
Darron Rowley
F I L L
Financial Independence, Live Life
achieving financial independence from 9-to-5 job before 50
Book manuscript written in 2020 & blog articles published in 2021 by Vincent Khor
Photo by Andriyko Podilnyk on Unsplash
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