Continuation from previous article written on January 26, 2016.

From previous article you are made to understand that your total EPF savings at retirement age (60) is
RM 889160.35.
The challenge now is to identify whether or not this amount in EPF savings enough to cover your life cost throughout your retirement period. Let's do the mathematics to discover the figure.

From the assumption given in previous article, your retirement period is 15 years and inflation rate is 4.5%.

STEP 1:

Your current salary of RM 4000 a month that grows 2% yearly will be RM 71325.47 per annum. This will be your last drawn salary. (Using TVM we can derive to this figure)

There are 3 retirement funding methods we can use, i.e. Capital preservation, Capital liquidation and Income replacement methods.

For this calculation i am going to use the 3rd method which is Income replacement method.

STEP 2:

At age of 60, i can confidently assume that all your loans such as mortgages and hire-purchases would have been redeemed. Therefore i will use 75% of your last drawn salary as the total amount you will need to finance your living cost yearly till 75 years.

That will be 75% x 71325.47 = RM 53494.10.

In another words, this amount is need for you at the first year subsequent to your retirement age. Since inflation is prevalent, you need to find out the total of all money at age 60, taken the inflation rate in play.

Let's calculate:

PV = PMT [  1 - {1 +i} power -ve n]
                          i

i here should be inflation adjusted rate. By using this formula i = { r-i}
                                                                                                        {1+i}
i adjusted is 0.0144

Therefore, the PV will be RM 717053.35.

This actually means that you only need RM 717053.35 at beginning year of retirement age in order for you to sustain your retirement age. However, from earlier article your EPF saving  of
RM 889160.35 can already cover this retirement need.

You will have a surplus of RM 172107.00.