How to calculate your retirement fund by “multiply-by-25 rule”?

As per the Ringgitplus Malaysia survey on Malaysian financial literacy, 21% of Malaysians didn’t save money at all. This is one of the biggest reason why most Malaysians cannot afford to retire.

There are many ways to calculate the retirement fund required. The one requires the financial calculator will be the most accurate one. However, is there anyway you can calculate your retirement fund based on some simple rule of thumb? Yes, you can calculate using “multiply-by-25 rule”.

Based on this rule, the formula is: –

Retirement fund required = 25 x annual income required during retirement

For example, if Ali needs RM 50,000 annual income to survive, the retirement fund required is RM 1,250,000 (RM 50,000 x 25).

This is assuming for 30 years’ retirement with 4% yearly withdrawal. How does the formula works? Basically, you are saving 25 years’ of annual income to fund 30 years retirement. It is based on the assumption that the lump sum is investing at a reasonable return slightly higher than inflation. Also, it is assumed that the yearly withdrawal is only 4% of the lump sum. For example, for the first year of Ali’s retirement, he will withdraw 4% of RM 1,250,000 = RM 50,000.

If one requires to retire early and have more than 30 years’ retirement, the fund needs to be bigger. Also, as mentioned above, the retirement fund requires to be saving or investing in vehicles which generate reasonable return slightly higher than the inflation. If the retirement fund is saved in normal bank account with no interest or low interest, higher retirement fund will be required too.

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