A Case Study

Let me give you a simple case study for you. You will understand how the Asset Growth Table learned before this could be usefull to determine your stipulated financial goal.

John and Alice are married and are 35 and 32 respectively. They want to retire at 55 and anticipated to live their retirement period until 75 and 78, respectively.

Current month expenditure in total average to about RM 3800(John: RM 2400, Alice:RM 1400) and have told me that they want to live throughout their retirement with an expenses equivalent to 75% of the last expenditure just before retirement, every year until to their last stroke of their breathe.

John and Alice brings back a total of RM4500 a month in salary. Their Asset Growth table currently amounted to RM 175000, generates a rate of return of 4.5% per annum ( inclusive of FD, Share, Unit trust et cetra).

Assumptions:

Current inflation rate is about 4.0% throughout.

Assuming that their salary growth is 0.00%.

Assuming that John's current EPF balance is RM120000 and Alice's balance is RM100000.

Assuming that EPF declares a dividend of 5.00% every year.

John's salary is RM 3800 a month and Alice's salary is RM1700 a month.

Their employer contributes 13% of their gross salary, while John's contribution and Alice's portion is 10% each.

Assume that they do not have any dependants and the monthly expenses fixed throughout.

Ok! Let's do the working now ( all figures are rounded for ease of calculation)

STEP 1:

Current expenses is RM 3800, or RM 45600 a year.

Given an inflation rate of 4.0%, in 20 years time the expenses is RM 99915.

STEP 2:

75% from RM99915 is RM 74936.

This is the figure they need every year to cover their expenditures beginning age 56.

The present value (at age 55-John) of all the yearly expenses needed until their last year (23 years during retirement) will be, RM 1,217,482.: This means JOHN and Alice must have this amount to satisfy their living expenditure throughout retirement period. Let us see if they have sufficient amount to match RM 1,217,482. If they don't have enough, then they are in great shit. They need to find the shortfall amount and match the retirement amount needed to fund their living expenses.

STEP 3 (a):

Current EPF amount is, JOHN - RM 120000 and ALICE- RM 100000.

EPF Dividend payout is 5.00% per annum

John has 20 years to retire and Alice has 23 years to retire.

At age of 55, by calculation John will have RM 318396 and Alice will have RM 307152

But this amount is only partial correct. Remember there is also a 23% contribution into each EPF account.

STEP 3 (b):

For John,each month 23% (or RM 874) a month of his gross salary is debited into his EPF account.At the end of his working tenure (at age 55), this amount would be equivalent to

RM 231,184.(where the inflation adjusted rate of return is (r-i/1+i)=0.9615)

For Alice, by the same calculation, her 23% deduction is RM 391 a month.Her total amount at 55 will be RM 120,725.

Let us see how much will both of them have in EPF balance at 55.

Add up to total in red in STEP 3(a) and 3(b): RM 318396 + RM 307152 + RM 231184 + RM 120725 = RM 977,457.

This amount is still not enough to match the retirement fund needed which is RM 1,217,482, calculated in step 2 above. THERE IS A SHORTFALL OF RM 240,025.

What we do when there is a shortfall? Somehow we have to find means of generating income to meet the shortfall. John and Alice are fortunate people because they have already started to build up Asset Growth Table while they are economically active. While most of us have a lackadaisical attitude towards being financially liberated, John and Alice are different.They would probably knew from the earlier ages that their EPF fund would not help them to achieve financially indepandance retirement life.

So, let us see if their Asset Growth Table could be the saviour in this context. If yes, then they should be happy!

I shall continue on my next session pretty soon, 'till then have a financially liberated life!