Retirement Series: Can you retire with RM3mil Net Worth?

Retirement Series #1
Can you retire (financially)? It is a big question that most of us ask ourselves. Retiring physically and retiring with a strong financial backing are two separate things to consider. Most of us are forced into retirement either by age, illness or retrenchments but very few of us are retiring because we are financially capable of. 

The context of the discussion is Are You Able to Retire with a RM3mil net worth? Again it's a big question but let's make some assumption below. Let's call this person 'Ant'

Background: Ant has a condominium with a market value of RM500k, fully paid for loans and 2 cars (market value of RM100k in total). He is 40 years old has a family with 2 growing kids age 5 and 10 years old, live a simple, decent middle-class lifestyle. Wife is working as a normal salaried worker with RM5000/month salary and plan to retire in 10 years' time. Average expenditure is RM10k/month. Assume to spend on kids until 23 years old for tertiary education and RM200k/child for tuition fees. Ant has 1 extra property which is worth RM500k, rental RM800 after deducting outgoings, loans paid off. RM800k in EPF (combined).

Quick Analysis
1. From the above, we know that Ant has RM500k + RM100k = RM600k which he is living in and using which he cannot monetize for investments. 

2. Ant need to set aside RM100k for emergency funds in FD

3. Ant has an investible asset of RM3mil - RM100k (emergency fund) - RM500k (investment property) - RM600k (net worth utilized for own usage) - RM800k (EPF funds) = RM1mil

4. Relies on EPF for 4-6% annual returns and from item 3 - returns from RM1mil investments (assumption in portfolios). Rental returns is expected to be RM800/month.

Detail Analysis

A detailed simulation done on how fast the funds will draw down with the scenario above.

The simulation is based on the below assumptions:
*expenditure grows at 3% p.a. (inflation). In reality food inflation is a lot higher than general inflation.

*wife's income grows 4% a year
*only withdraws necessary expenditure from EPF
*Cash Returns from RM1mil Portfolio assume to be 5% p.a.
*wife only works for another 10 years
*sell off RM500k investment property to fund 2 children's education in 15th years. Assume property value appreciation is sufficient to fund escalated education fees
*at 61 years old, kids grown up and financially independent. Take away RM4000/month from expenditure
*Mr Ant would like to maintain his Middle Class lifestyle (i.e. having B or C-segment cars, attending social events, active in recreational activities that will cost some money)

So, what does the above Analysis says for Mr Ant and family:

#1. His money will run out at 70 years old, leaving him with only his property and remains of his assets. To survive, he has an option to sell his house and rent it. But with the same lifestyle, it'll only last 5-8 years, sadly.
#2. Having RM1mil in investible (cash) and RM800k in EPF will typically runs out in about 30 years' time (scenario for a middle class lifestyle living in cities like Penang and KL)
#3. For Mr Ant, he will either need to take up income generating jobs for another 5 - 10 years or ask his wife to work until 55 or 60 years old. This will help stretch his retirement funds. 
#4. Considering getting the kids to obtain scholarships for tertiary education to save up some money and stretch retirement.
#5. Invest in Stocks or move higher proportion of investments into higher yielding vehicles (i.e. stocks, equity funds). This definitely means higher risks, but he should be able to take it since considering his retirement is his choice, not due to medical circumstances.
#6. Insurance must be bought to prevent any financial shocks in the event of any medical emergencies and big ticket expenditures.

Alternative #3: Scenario - Wife works till 60 years old

So, you can see by having Ant's wife working until 60 years old, the same scenario changes and now the family retirement funds can extend until 80 years old. Again, this is assuming that Mr Ant and wife is adamant that his savings will not run low and keep spending at the same level. We also acknowledge that at some point, it will likely come down if Mr Ant is healthy both mentally and physically (hope that no nursing home or home nurse requirement during old age which would cost a bomb!).

Next, I will talk about how can you stretch your RM and retire with a RM2mil nest egg. It's an interesting concept but will require some degree of financial knowledge to ensure it works.

Retirement Series:
#1: Can you retire with RM3mil Net Worth?
#2: How can you retire with RM2mil cash?
#3: What is your spending power with RM6,000/month
#4: Is it possible to build a Retirement Portfolio averaging 6% return per year without EPF?

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