Finance Ideas

How A Fresh Graduate Plan to Retire in 8 years

I am so glad to receive an email from a young reader, Sam ( not his real name):

Hello,I am glad to find a financial blog by Malaysian. I would love to ask advice from you regarding my financial planning. I am now 25 year old student but I plan to start investing next year after I graduate. I plan to use mutual fund as my financial vehicle. I plan to invest at least RM1,000 per month in fund and I plan to retire within 5 to 15 years. Can you advice me roughly what fund portfolio should I have? my risk tolerance is moderate. Is there any possible ways for me to reach my goal quickly and more effectively?
Thank you. hope to hear from you

In order to give him more accurate suggestion, I need more information. This is the email I sent to Sam:

Regarding your inquiry, I need to have more information to give proper advice:1. What’s your aim on retirement? Example, having RM5,000/month passive income
2. How do you plan to save RM1000/month? It is not easy to do that especially for a fresh grad. I would love to hear your story.

I am so surprised that Sam actually has all the answers already. He has a very clear goal and also a plan. Let’s see how he plans for his retirement. This is taken from his email:

For now I am studying Engineering in Australia under parents’ sponsorship.
So far after some salary from internship and persistant money saving, I predict when I graduate, in somewhere september 2008, I will have a pool of roughly around RM85k. I predict my final $$$ will be between 60k to 100k RM in my bank.
I would put roughly 80k RM of this money into fund, most likely Public Mutual. One reason is I checked most mutual fund companies offer similar rate everywhere, like 5% load, 1,5% management fees. Sheessh, not much choice in Malaysia. That’s for my initial rate.
I would be 26 year old when I graduate. I will adopt max income, min expenses strategy for my first 5 years of working. If I am to work in Malaysia, I will pick a company that is willing to pay me RM4k a month, which I doubt I will get it due to poor appreciation of Human Resource in Malaysia. So I have been planning to work oversea for about 2 years to gain experience, contacts and also high income (possibly over RM10k if I work in Europe or Dubai).
So for the first 2 years, the income will support my investment, between 1k to 2k per month. I think it should be OK, dunno why people invest very little as RM100 per month only.
After having enough experience oversea, I think I will be able to find a job with good salary when I come back to Malaysia to cover my investment input.
My plan of retirement is having passive income of at least RM4k per month, or having at least 0.5 million in my portfolio, either one of them that has higher value. The time frame for such goal is within 5 to 15 years. I hope it is possible with my initial 80k RM capital and bullish trend recently.
I plan to put my bet in mutual fund, with moderate risk (for now)
The first 2 years working oversea will be hard for me to monitor the situation. I plan to have the portfolio of 90% in balanced fund and 10% Bond fund while i am oversea, and when I come back to Malaysia I plan to have portfolio of 10% bond, 50% balanced and 40% equity. I hope I am not too conservative
I am expecting 15% growth per year at least (my conservative expectation) and I think the goal will reach faster if it is 25% to 30% return per year.
I plan to be a persistant dollar cost averaging investor, planting money every one of two month consistently into my fund.
I plan to put my money into mayban account because it has online banking, making it easier to manage my $.
For educating myself, I have bought some good books to read. For personal financial planning, I bought the book Your Money or Your Life and Wealth Odyssey. They helped me to manage my relationship with money, by saving more and spending less.
Then I bought All About Mutual Funds, to learn about basics of MF and I might buy The Morning Star Guide to Mutual Fund, to learn some effective strategies in fund.
I also asked my parents to order monthly Personal Money to gain info about the fund news.
Thanks a lot for helping and sharing

Retirement Plan

Before we do any calculation, let’s get a clear picture of his retirement journey, as shown in Figure 1

Figure 1: Illustration of Sam’s Retirement Plan
From his email, we know the following information:
1. He will have at least RM80,000 net worth to start with at age 26
2. He will continue to invest at least RM1,000 per month starting from age 26.
3. Expected return is 15% per annum.
4. His retirement goal is RM500,000 or passive income RM4,000/month. In this case, I will use RM500,000 as the main goal because for 15% return, RM500,000 capital will give him RM75,000/year, or RM6250/month which is more than RM4,000. This is a more difficult task compare to RM4,000/month passive income.
Now, what we have to do is to calculate the value X = the retirement age, if all goes well as planned. Use this simple saving calculator.
Key in the following data as shown in Figure 2.

Figure 2: Simple Saving Calculator data entry page
Here is the result:

Figure 3: Saving schedule
Sam will reach his retirement fund goal at year 8th. He will be 34 years old at that time.
Result: Retirement age, X = 26+8 = 34 years old, which is also within the time frame he set (5-15 years).

How about Inflation?

We all know that inflation will cause money depreciation. After 8 years time, is the RM6250/month equivalent to RM4,000/month purchasing power now? Let’s do some calculation, using this Financial calculator:

Figure 4: Financial calculator used to calculate the annual rate.
Input the information as shown in Figure 4, except the interest rate per period, and press “IR”.
The result is 5.74%. This means that even if the inflation rate is high, as long as it is lower than 5.73% per annum, the purchasing power of RM6250 after 8 years time is still higher than the current RM4,000.

Is the passive income inflation adjusted?

In this discussion, it will be a little bit confusing. But I wish that I can give a very simple and clear explanation.
When Sam retires at age 34, he will have RM6250/month to spend. Meanwhile, his capital of RM500,000 is intact and preserved. But if he keep spending RM6250/month, his RM500,000 will still remain the same RM500,000, forever. At the same time, inflation keep depreciating his money. He will soon realize that his RM6250/month is not adequate anymore.
In this case, he can’t practically spend all his passive income. He should leave a certain portion of the return, and put it back into the capital and keep accumulating it to hedge against inflation. If you study financial planning courses, you will know that there is a formula to calculate the Inflation Adjusted Rate (IAR) :

Inflation Adjusted Rate (IAR): The periodic
rate of return on an investment after adjustment for inflation. Formula: I.A.R = (1+
nominal interest rate) / (1 + inflation rate) -1. (Multiply x 100 to convert to a
percentage rate) A rate used to express future sums in constant (non-inflated) dollars.
Permits the measurement of the buying power of future dollars as measured in today’s
dollars.

In order not to confuse you in this matter, just imagine Sam has to deduct the inflation portion from his returns before he can spend it. Let’s say inflation is 3%, for the return of 15%, we can simply deduct 15-3 = 12%, which Sam can treat it as the usable passive income.
The actual passive income Sam will have at age 34 is RM500,000 x 12% = RM60,000 p.a. = RM5,000/month.
After that, his principle retirement fund of RM500k will grow because he only spend 12% of the return and 3% is injected back into as capital investment. During the next year, the 12% return will give Sam more than RM5,000/month to spend, which will hedge against inflation.

A Plan is Nothing without Action!

Sam’s plan can be implemented. If he does it correctly with the highest commitment, it will work. I think the main challenges are:

• Will he be discipline and consistent to really spend only the minimum and save the maximum?
• How to constantly get a return of 15% per year? It’ll require another post to discuss this matter. I learn that Warren Buffett’s investment returns is about 25% p.a.
• Can he set aside all the other family commitment – getting married, having children, home purchase, car purchase etc. – that might be obstacles during his accumulation period?

Why a million $$ goal???

You Must be A Millionaire To Survive Another 30-40 Years!!!

Recently sitting in a restaurant, my buddy, commented on the few articles “why are you so materialistic. You wanna have big house, big car, million ringgit, various properties, just to show others, and how well you want to do!?” he continued, “Is this a satisfaction to you?, or show off to others of what you’ve got?”. Well, being a friend of mine, I didn’t really expect him to ask such a question, but to a certain extent he was really looking at the other side of coin that I have not seen yet. I knew that the reason I shared my story in earlier blog was to give hope and support to others that if I suffered, yet able to do it, so can you, and also put in a few strategies that may help others. Well, good, at least his question had me to share an interesting concept, on reasons why I want to have a Million.

Let’s go back to our current lifestyles, we live on an income, and we have expenses and tax that are unavoidable. Let say our household income is $10k a month, with expenses of house mortgage, car loan (some people got 2), child care, utilities bills (water, electric, phone, internet etc), credit cards, groceries, pocket money (inclusive of petrol money, food, drinks, movies); and finally let say we save $2000 a month, which means that our monthly living expenses would be $10 income – $2k saving = $8k expenses. While assuming all our months are same in terms of daily activities and expenses, which is not true, we need $8k to survive without savings. Now, I am not saying that all of us have $8k lifestyle, some people only live on $3k, $5k, while other may live on $15k, $20k depending on the lifestyles. So let’s take the example of $8k expenses monthly. Which means in a year, we need $8k x 12 to survive, which is $96k per annum. Do you agree so far? Now I am not putting in other expenses like holidays, festive season shopping etc with assumption we have had buffer in the $8k lifestyle.
The question would be, if we are not working after 55, or 60, our expenses remains the same and the source of income that stops for those employees and most employment in Malaysia are without pension schemes. So where is your source of income comes from ? Most people have a few options :
a. Live with their children, baby sit the grand children so that you get roof and food daily. – the lifestyle have changed, no free meals, even from our children in future. I know many may disagree with me but this is the truth.
b. Work part time while you can, but with the part time job, you may not earn as much as you were an employee, so re-size your lifestyle to what you can earn while keeping yourself fit for the job – better option would be not to retire anyway.
c. Have savings to earn up and replace your salary with similar returns as passive income, retire with a stagnant income as per your employment or even better.
I guess, you have already got the option right. (c.) Have savings to earn up and replace your salary……but there is an interesting twist to this. So I am very worried about my future now, what would happen to me when I pronounce retired!!, I wouldn’t want to be at (a.) or at (b.) that is a choice for now and the only way we can, while we can, change that is now to plan our future.
First of all, is the question of what type of passive income business is there with ROI for us to generate $96k lifestyle per annum ? Well, if we barely look into cash and savings accounts, at 3% interest, it would be $3.2M savings, if 5% then we need $2M and if 8%, we need $1.2M, finally with 10% returns, we still need $1M. So, if there is a savings or investment scheme (proven/legal/working) that gives us a 10% return per annum, year in year out, we need to have a saving of $1M!!.
The news is if you are 30 years old and plan to retire at 60, for the next 30 years every month you need savings of $2K to achieve that million (assuming all the compounding interest). Now that is if you have a place with 10% returns!! It doesn’t exist, what would be the best return rates that we have in market today – 5%?, 7%?, or 8%? The fix deposit is hardly at 3%, EPF 4%….so let say we got the best deal of 7% somewhere, Bank A; then we need to have savings of $1.4M !!, again if you are 30, and retiring at 60, so you need to start saving $3.5k a month, you can do the math.
So whether it is, fortunate or unfortunate, savings may be only one of the options here. But those already hitting at a million, you are save for now. I am not going to confuse all of us with the inflation rates and so on because your $8k lifestyle may not be the same in terms of buying power in next 10-15-20 years. But let’s assume, we are okay with that number and hope Malaysia will rule the world in terms of economy and the inflation doesn’t goes that high up. We have high hopes, Malaysia Boleh!!. What would be the other options ? That is part of the strategy that you ought to put into your plans, how are you going to achieve these retirement planning? Can the financial advisor and an insurance agent sit down with you to outline the retirement plan, if yes, then sit with them and have a plan, with a goal that when we say “RETIRED”, we want to retire in style.

I don’t see anything wrong, if we want to retire with a monthly steady income from our investments, with that income not only we are able to survive, but be able to provide to others, our spouse (that is a great time travelling and spending time together), our children (although earlier I said no free meals, but parents are always parents), our grand children (imagine them having to come to grandparents house to be pampered), and have our health taken care ( that should come from our insurance policy and not savings).
Do you have your plan ready ? Have you thought about it? Remember, procrastinating each day, you are losing the interest rates and days in mathematical calculations for your saving plan. We are still lucky to have started at 35. You?


Get Rich with Excessive Debt???


This article shows you how the rich get richer with excessive debt. Bad-debt-free makes you a freeman. But if you know how to leverage with good debt, that’s the exact secret of wealthy people.

Introduction

Paying debt is like a nightmare to ordinary people. Most people hate when it comes to the due date for mortgage installment, car loan installment and credit card debt. Probably the reason debt gets so much hatred is because it is associated with bad consumer debt most of the time. Those are really bad debts that we should hate and avoid. In order to get rich, make friends with good debts instead.

How Good Debt Makes You Rich

For illustration purposes, I will show you two different scenarios how a person handles debt that affects his financial situation. John earns $10,000 each month, spend $5,000 and save the other $5,000. Figure 1 shows his current cash flow and net worth charts.

Figure 1: John’s monthly cash flow and net worth chart.
For easy illustration, let’s assume John’s only asset is his house worth $200,000. His outstanding mortgage is $150,000, leaving him a net worth of $50,000
Scenario 1: Buy a bigger house
John found a great deal to buy a bigger house which is worth $500,000. So he sold his existing house, and use the $50,000 remaining cash for down payment. After buying the bigger house, his mortgage installment increases. Moreover, all other home related bills also increase because a bigger house needs more electricity energy supply, more maintenance works, more quit rent etc. This resulted in higher expenses – $8,000 per month. His surplus dropped to $2,000 per month only. Figure 2 shows his new cash flow and net worth charts.

Figure 2: John’s monthly cash flow and net worth chart after buying a bigger house.
Scenario 2: Buy another house for investment purposes
Instead of moving into a bigger house, John decided to invest in real estate by buying another house for rental income and capital appreciation. The new house is worth $300,000 and he got a deal that doesn’t require any down payment. His monthly expenses rise and in fact it is just the same as moving into a bigger house shown in Scenario 1. However, because the new house is rented out for $3,000 a month, his income rises to $13,000. This allows him to continue to save $5,000 per month. Figure 3 shows
his new cash flow and net worth charts after the investment.

Figure 2: John’s monthly cash flow and net worth chart after investing in a new house for rental income.
Simply looking at the net worth chart, Scenario 1 and Scenario 2 are identical. But Scenario 2 will definitely makes John a wealthier person because he has increased his cash flow. After 1 year, his saving is double of the case of moving into a bigger house.

Bad-Debt-Free vs. Good-Debt-Free

Good debt works for you. Bad debt makes you its slave.
Good debt increases your income. Bad debt decreases your savings.
I know some people think that mortgage of the homes they are staying in are good debts. But in fact, it is a bad one because it doesn’t increase your income.
I want to be bad-debt-free. At the meantime, I want to learn how to leverage my investment with good debt.
Please note that if John’s houses appreciate by 10% a year, it is calculated from the total assets of $500,000. This means he gets $50,000 return a year. But if he didn’t buy the house, how much can he get for 10% return from other investment such as mutual fund? He can only invest with the monthly $5,000 surplus, which is just a small fraction of $500,000. If John prefers to be totally debt free, he reduces the chances to get rich faster.

If you want to be totally debt free, it might cost you a great fortune!