18. WHAT IS DEVALUING YOUR HARD-EARNED MONEY?
“Inflation is crabgrass in your savings, unseen robber of your money, and taxation without legislation.” -- Robert Orben
Do you notice that the same item you buy today costed less a few years back? For example, we used to be able to have our favourite roti canai and teh tarik for RM1.00 each. Guess how much it costs now? In most places the same roti canai and teh tarik would cost us RM1.50 each today.
I used to buy my favourite pan cake at night market for RM0.70 five years ago. Today I need to pay RM1.30-RM1.40 for the same piece of pan cake. At some night market stalls, the same RM1.30 pan cake has shrunk in size too compared to a RM0.70 pan cake five years ago.
Same thing for a small little cup of good old black coffee from kopitiam. My dad used to tell me that during his times, a cup of coffee was only 20 cents. Yes, you heard it right. You could get a glass of coffee at a coffee shop for only 20 cents. My dad said that literally speaking, a twenty cent was as huge as a car tyre in his days. That was how valuable the twenty cents then.
Today, we can hardly buy anything with 20 cents.
If you walk into any 7-11, 99 Speedmart, or KK Supermart convenience stores today and show the twenty-cents in your hands and say, "Sir, I have only twenty cents left. Please tell me what can I buy with my twenty cents?" Perhaps some sweets only. Twenty cents cant’ even buy you the cheapest bun on the shelf.
What has devalued your hard-earned money over the years?
It's called inflation.
Inflation is an overall increase in the Consumer Price Index (CPI), which is a weighted average of prices for different goods. The set of goods that make up the index depends on which are considered representative of a common consumption basket.
Depending on the country and the consumption habits of the majority of the population, the index will comprise different goods. Some goods might record a drop in prices, whereas others may increase. Hence, the overall value of the CPI depends on the weight of each of the goods with respect to the whole basket.
Will inflation continue to devalue your hard-earned money in years to come, way into your retirement?
Unfortunately, the answer is a hard-truth yes.
Annual inflation, refers to the percent change of the CPI compared to the same period of the previous year, is usually used to gauge how much the same set of goods that make up the CPI index would have increased or decreased over time.
Therefore, it's crucial that you take inflation into your equation when calculating how much money you need to retire, and how much you need to spend after retirement.
What is the effect of inflation on our daily lives?
When you pay RM15-RM20 for the same haircut you used to get for RM10 at barber shop, you know it’s the effect of inflation.
Nowadays some intelligent fresh graduates can easily get a starting basic salary twice as much as what I used to get as a fresh graduate 27 years ago. During those days, this kind of high salary was unheard of. But I guess today’s largely higher salary for selected bright individuals is also due to talent shortage in addition to the effect of inflation.
Annual inflation rate in Malaysia
According to Macrotrends, Malaysia’s annual inflation rate was 2.10% in 2015, 2.09% in 2016, 3.87% in 2017, 0.88% in 2018, and 1.02% in 2019.
If we look at Malaysia’s inflation rate for the last twenty years (2000 to 2019), only 5 out of 20 years registered inflation rate were above 3%. This means over the last twenty years, 75% of the time Malaysia has registered annual inflation rate below 3%.
Please see the summary chart below on Malaysia's annual inflation rate from year 2000 to 2019 for your better understanding.
Malaysia Inflation Rate – Historical Data | |
Year | Inflation Rate (%) |
2019 | 1.02% |
2018 | 0.88% |
2017 | 3.87% |
2016 | 2.09% |
2015 | 2.10% |
2014 | 3.14% |
2013 | 2.11% |
2012 | 1.66% |
2011 | 3.17% |
2010 | 1.62% |
2009 | 0.58% |
2008 | 5.44% |
2007 | 2.03% |
2006 | 3.61% |
2005 | 2.98% |
2004 | 1.42% |
2003 | 1.09% |
2002 | 1.81% |
2001 | 1.42% |
2000 | 1.53% |
Hence, the average annual inflation rate based on 20-year historical data is 2.18%.
For your references, Singapore’s average annual inflation rate is 0.44%, United States’ is 2.44% and Thailand’s is 1.06%.
What percentage of inflation rate shall you use to plan for your retirement?
With the facts and figures above, I believe it's relatively safe to use 3% as an average annual inflation rate to calculate how much money is required to retire in Malaysia as well as how much money is required to spend annually after retirement.
This 3% is the same percentage I used in earlier chapters, now better explained, so that it sticks to your mind loud and clear.
Remember: Inflation is crabgrass in your savings, unseen robber of your hard-earned money, and taxation without legislation. You can’t just ignore inflation.
What will be your minimum target for annual investment return?
Your target will be to stay above inflation rate of 3% in your annual investment returns.
3% is like the sea water level.
If you dip below 3% in your long-term investment returns, you are sinking in the deep sea. Not that you won't survive, you still will - but you will be struggling hard due to devaluation of money from inflation over long term.
If you are a conservative, risk averse person like myself, then it's good to have a conservative target to achieve around 6-7% annual returns from your investment portfolio.
As your principal money grows over the years using “Multiply by 25” rule as a basis of calculation, your 6-7% annual returns will slowly allow you to withdraw 3-4% every year for your hope-for living expenses based on 4 percent rule, taking the 3% inflation rate into consideration.
For your retirement planning target, here is the simple equation:
7% targeted annual returns on your investment portfolio = 4% allocation for your hope-for living expenses + 3% allocation for annual inflation |
SECTION 4
Make Your Money Work for You
“Either make your money work for you or you will always have to work for your money.” -- Marshall Sylver
F I L L
Financial Independence, Live Life
achieving financial independence from 9-to-5 job before 50
