November 2020

How much you should save per month for your retirement?

When we do financial planning, retirement goal is always the biggest goal. All of us know that we need to start saving early to accumulate our retirement fund. However, how much should we save per month for our retirement? It depends on these factors: –

How long do we have before our retirement?
Are we willing to down grade our lifestyle during our retirement?
How aggressive are we in investing our money for retirement?

The longer we have before our retirement, the lesser we need to save per month. If we are willing to down grade our lifestyle or spend much more lesser during the retirement years than pre-retirement period, we can save lesser during pre-retirement. The more aggressive we are in investing our money (of course, it also means the more return we get from our pre-retirement saving), the lesser we need to save per month.

As a general guideline, one should save and invest minimum 30% of his / her net salary for 30 years at 5% net growth to enable him / her to sustain 30 years’ retirement with 70% – 80% of the pre-retirement expenses. So, start saving 30% of your income now to achieve your retirement goal.

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How to ensure you don’t outlive your retirement saving?

There is a research from Employee Provident Fund Malaysia (EPF) shows that 70% of Malaysians outlive their retirement savings. This is a very sad statistic.

Due to the pandemic, many Malaysians are struggling hence the government has just announced (26 Nov 2020) to allow eligible Malaysians to withdraw their compulsory retirement saving (Employee’s Provident Fund). Read the news here.

This will in fact affect many retirement plans, especially those who do not plan well for their financial future. There are two reasons why the retirement saving is not enough:-

Malaysians underestimate the retirement needs. Many think that they would have earned enough money when they are older. Hence, they do not save or do not save enough when they are young.
Life expectancy is getting longer due to the advancement of medical equipment and technology.

To make sure one do not outlive his / her retirement saving, here are some tips:-

Understand how much you need for your retirement. You can read more on how to calculate your retirement amount here. Awareness is the beginning of a change. Many people do not save enough because they do not understand the retirement amount needed is huge. Once they know the figure, it is more likely they will plan well to save more.
Start to save early. The retirement figure is huge. Say one needs RM 1 million to retire, if only 5 years are remaining before he retires, he needs to save RM 200,000 a year. If he started 15 years earlier, the required saving amount will be RM 50,000 a year only.
Start to invest. Investment can help one’s saving grow faster. To reach RM 1 million retirement sum, one needs to save RM 50,000 a year for 20 years @ 0% interest. If he chooses to invest @ 5% interest rate, the amount that he needs to save is much lesser, i.e. RM 30,300 per year.
Be healthy. One of the most expensive bills during the retirement is the medical bill. Ensuring good health will reduce the expensive medical costs. In addition, it is important to get yourself covered with medical insurance to avoid your saving being wiped out for medical expenses before your retirement. While being healthy, you can choose to work part time during your retirement to earn some income.
Diversify your investment portfolio. While investing, never forget to do the risk allocation for your investment assets. During retirement, the investment income is needed, hence investing in extremely aggressive or volatile assets would not be suitable. Try to get to more aggressive investment portfolio when you are young but switch to less aggressive investment portfolio when you are nearer to your retirement age.

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Work harder and longer for leaving a legacy?

There is an interesting article which shares that Japanese who wants to leave a legacy will work harder and longer. Those who do not leave legacy will work hard but not longer (read the article talking about this here).

I have a slightly different view to the above. Leaving a legacy for children does not need to work too much longer. Legacy can be built through insurance fund. If we want to leave a legacy using our own assets, it will definitely take longer time to accumulate. However, if we pay some fraction of money to purchase a large payout insurance policy, then, leaving a legacy to our children will be very simple.

See this example. John (aged 30) wants to leave RM 2 millions to his 2 children when he passes away. He will need to save and accumulate RM5,500 a month continuously for 30 years to accumulate RM 2 millions assets. Can John enjoy life after 30 years if he wants to leave all monies he saves and accumulates for his children? The answer is an obvious NO. What if he spends RM 1,500 a month to buy a RM 2 million insurance policy, his children will get the RM 2 million insurance payout when he passes away. If he can save RM 5,500 a month, he can use his remaining saving, i.e. RM 4,000 (RM 5,500 – RM 1,500) to enjoy his life and for retirement.

Do you need to work harder and longer for leaving a legacy? Not really – You just need to be smarter and choose the correct financial tools to help you achieve your financial goals. Don’t ever sacrifice your life especially your retirement life because of your children. You deserve to enjoy your life better because you work hard too!

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Bond or equity?

The current pandemic resulted more local corporate bonds to be issued to fund private projects. You shall see more bonds being issued in 2021. Is it a wise choice to invest in bond?

As a moderately aggressive investor, I personally prefer equities more than bonds. Bonds have the benefit to generate consistent income stream and more stable return over equities. However, the return is quite low compared to equities.

Source: https://www.investopedia.com

If you look at the above chart, the biggest 500 companies in US actually delivered average return more than throughout the years (with many years reaching above 10% and some years more than 20% – 30%). At such low rate environment and considering the impact of pandemic to the economy, many value stocks and equities are still trading at a discount. This will be the time for us to be more aggressively investing, fishing and hunting for more equities, especially for those who have not started investing, than to be too conservative. How to hunt for good equities? I have discussed this topic in my blog, read here. Sectors and industries to be focused on are discussed here.

One portfolio shall contain bonds because bonds serve as cushion and protection for high volatility market during this unprecedented period. I have also discussed the asset allocation of bond / equity in this blog. In conclusion, if you are not retiring yet and require growth than stability, equities shall be the preferred option.

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The next investment target, China?

The US election result is likely to benefit China as the trade tension cease (read the investment note here). Over the past 4 years, US had strategically used various tools against China including imposing tariff. China on the other hand has become better prepared and shifted its target from relying on external economies to “internal circulation” via “dual circulation” strategy. Hence, the US election shall have lesser impact on China’s economy compared to the past.

China is the world’s second-biggest economy. Its economy grew 4.9% between July and September 2021, compared to the same quarter last year. China is now leading the global recovery based on its latest gross domestic product (GDP) data.

Last week, China’s market regulator has taken its first step towards curbing the monopolistic power of its tech giants with the announcement of draft of antitrust rules. This has in turn made the share prices of tech companies like Alibaba, Tencent, Meituan drop.

On one hand, the fundamental of these companies is solid. The technology and internet economy are likely to be used widely in the future considering the people now are used to work from home and rely on internet shopping more than ever after. The shock of the pandemic has reinforced the trend of digitalization and internet-based businesses. The sales and earnings for these companies are seen to increase sharply during this pandemic period. The share prices of the China tech companies are now lower while the fundamental remains solid, I personally feel that it is a good opportunity for investment in China specifically technology companies.

There are various funds available in the market currently for China market. If you are interested, do contact me.

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What are the main benefits you will get from the recent Budget 2021?

Budget 2021 was announced recently to achieve 3 goals, i.e. people’s wellbeing, business continuity and economic resilience. The main benefits for individuals are as follow: –

Tax benefits

1% income tax cut for those having annual income between RM 50,001 to 70,000
Tax exemption limit increased from RM 10,000 to RM 20,000 (for each full year of service) on the compensation for loss of employment for those who lost the job due to COVID 19
The government expand the scope of medical treatment expenses to cover vaccination expenses. The tax relief is now up to RM 1,000 for taxpayer, spouse and children.
The tax relief limit for the medical expenses for taxpayer, spouse and children is increased from RM 6,000 to RM 8,000
The tax relief limit for full body check-up is increased from RM 500 to RM 1,000
The tax relief limit for the medical treatments, special needs and parental care is increased from RM 5,000 to RM 8,000
The tax relief limit for the lifestyle is increased from RM 2,500 to RM 3,000
The tax relief limit for PTPTN Tabung Pendidikan is increased from RM 6,000 to RM 8,000
The tax relief limit for Private Retirement Scheme (PRS) remains the same as RM 3,000 but extended to year 2025
The government expand the scope of tuition fee to cover up-skill courses provided by certified bodies. The tax relief is now up to RM 1,000.
Stamp duty exemption for first home buyers up to RM 500,000 from 2021 to end of 2025

EPF

Employees’ min EPF contribution is reduced from 11% to 9% for 12 months in 2021
Withdrawal of EPF of RM 500 for 12 months, maximum RM 6,000 in 2021
Purchase of life insurance, takaful protection for critical illness for self and family using EPF account 2

B40

RM 50 voucher as financial aid to purchase Perlindungan Tenang product like Takaful and personal accident. The stamp duty for Perlindungan Tenang products with annual premium / contribution not more than RM 100 will be waived until 2025
RM 180 telecommunication credit for internet subscription or purchase of new phone
Targeted Loan Repayment assistance with loan moratorium extension

Bantuan Prihatin Rakyat

Allowance of RM 1,200 (with 1 child) and RM 1,800 (with 2 or more children) given to family with household income < RM 2,500
Allowance of RM 800 (with 1 child) and RM 1,200 (with 2 or more children) given to family with household income between RM 2,501 to RM 4,000
Allowance of RM 500 (with 1 child) and RM 750 (with 2 or more children) given to family with household income between RM 4,001 to RM 5,000
Allowance of RM 350 to individuals (aged 21 and above) with earning less than RM 2,500

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Where is the source of wealth?

In the last article (read here), you know that debt is the backbone of the current economy. We cannot live without debt. On the other hand, do you notice where is the source of the wealth? Who is creating the biggest wealth? Please refer to the last article (https://evainvestmentjourney.wordpress.com/2020/11/06/debt-is-money-our-current-monetary-system-is-debt-based/) for the illustration below.

It is Bank X. Bank X did not come up with the initial deposit. It had no cash at all initially. It is A who contributed the cash. Through lending money to B and D, Bank X received interest income out from nothing.

A and C are savers. They received some deposit interest from Bank X because they contributed their cash. However, for sure, what A and C received will be lesser than Bank X.

B and D are the borrowers. Are they the losers in this scenario because they need to pay off loans? B borrowed money to buy a car. There is no income generated from the loan. Hence, he needed to work harder to earn more money to pay off the loan.

D borrowed money to do business. The more loans he got, theoretically, he would be able to buy more products to sell. Hence, his profits will increase. Through this example, I hope you understand that the one who is borrowing can be in the better position than the savers if the loan is used to purchase the right thing.

I will write more about this in the coming weeks. Stay tune!

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Debt is money! Our current monetary system is debt-based

When it comes to debt, many people think that debt is a bad thing. Many are trying to avoid it. Is it true? If it is, why we are still having debt in our economy. Why this bad system is not being abolished? In fact, it is important for our economy.

On 15 August 1971, the United States President Richard Nixon announced the change of the rules of money and suspended the link between money and gold. Since then, the US dollar (money) is no longer defined by gold. The money becomes debt-based which is the current monetary system. This decision has not just affected the United States but the whole world. The money is then supplied based on Fractional Reserve System which requires more debts all the time.

Fractional Reserve System is a system whereby the banks can take most of the deposits from the depositors and lend out to people and institutions which require loans, after reserving some portion of money (as reserve). For example, when A deposited $ 100,000 to bank X. Say the reserve requirement is 5% for easy calculation, the bank only required to maintain $ 5,000 in the bank as reserve. Then, the bank lent out $ 95,000 to B to purchase a car from C. C received the money from the bank and deposited the $ 95,000 to bank X instead of keeping it at home. Next, bank X had extra $ 95,000 as deposit which it lent out $ 90,250 ($ 95,000 x 95%) to D for him to buy some products from E to run his business. How much money has been created through the scenario?

Debt
B – $ 95,000
D – $ 90,250
Total $ 185,250

Money
A – $ 100,000 (hard cash)
C – $ 95,000 (new money created)
E – $ 90,250 (new money created)
Total $ 285,250

Through the system, you can see extra $ 185,250 is created in the market using $ 100,000 hard cash. The above is just a simplified version of money creation. The process can go on and the money creation can even reach millions. As long as people are depositing money into the bank, the bank can lend out the money, the money creation process will keep going. In conclusion, there is no way debt will get abolished. We all need it for economy growth.

No debt, no money creation. Debt is in fact money!

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