I am glad that more and more of my friends are getting more financial savvy now. Last week I met a friend whom told me he wants to have a huge amount of money (eg RM500K) and retire for good. Some times we just want a simple life. Imagine if you have RM500K and invest into a very safe investment which gives you 10% return per annum, only from your return from investment you will have about RM4K to spend every month. By that time, working is just a hobby. :) Therefore I am writing this article to show how can you make it. But this time lets make it tougher, we target to make RM1million.
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Are you ready for the discussion? Let see how shall we starts... There are many assumption and status-quo factors which MUST be included. I'll explain bit by bit
Annual Income
I start with a average annual income of RM36k annually. This will include your basic, allowance and bonus for the whole year. Your salary increment will be as follows:-
First 5 years = 7% growth in your annual income
Next 5 years = 5% growth in your annual income
Next 5 years = 3% growth in your annual income
There after no increment ( just to be more conservative in my analysis )
Initial Investment
My research will starts with someone with a RM10K to start as his investment. This money is not necessary in cash form, it can be your assets in stock market or even your fixed deposit, unit trusts, investment link etc. But this money must be a liquid asset which can be reallocate according to the investment strategy as below.
Investment Strategy
We will put all the investment money into equity fund (50%) and bond fund (50%) with the assumption that equity fund will be able to garner 15%pa return in the long run while 7%pa for bond fund. Opss another very important assumption in this analysis is that you are not the Warren Buffer of Malaysia. Anyway as long as you can make an average return of at least 10% return pa in the long run shall still fits into this analysis.
FYI for the past 5 years, the average return for all the equity funds in Malaysia is 20%. But to be more conservative, I only use 15% as the expected return in this analysis. Anyway for bond fund shall be quite save to say 7% pa because most bond fund can make 5% to 8% return pa.
EPF Investment
I assume that your employer contribute 12% into your EPF account and yourself 11%, therefore total will be 23% of your income into your EPF account and expected return is 5.5% pa. Again, I assume that this money is purely for retirement purposely, thus we won't take out this money to other purpose such as purchase house/ further studies/ medical expenses.
Savings
I assume that you are able to save 30% of your annual income net after EPF deduction. But I didn't include the consideration for tax expenses. Its quite difficult to include tax expenses because everyone might have different tax rebates etc. Therefore pardon me that this analysis do not include tax expenses which can range from 3% to 28% of your total income taxable.The savings each year will be included into your investment fund at the end of each year ( add into "beginning invst").
Total Asset
Therefore your total asset shall be the ending invst amount plus the EPF savings.
Conclusion
Based on all the assumption above, you will be able to accumulate your first million in the next 18 years. My friend whom asked me shall be 45 years old by then.... Opppsss... I hope he doesn't mind his age is disclosed. If you have 1 million, what would you do? :) Too early to dream? Not really, just properly plan your strategy now... based on my analysis, you will be a millionaire soon. Please remember me when you are a millionaire... I might need some funding from you :)So if you have RM1million, if you just take out the return of 10% pa, you will be able to answer a annual income of around RM8k per month. Wahhhh happy? Well focus on how to build your wealth, not to think when is the next recession. Focus in recession will cause your wallet to go recession too. Have properly financial planning and understanding about the investment instruments.
P/S: Based on the same assumption above but just different target saving, your 1million will be on:-
10% saving, will be able to accumulate RM1 Million in the next 22 years
20% saving, will be able to accumulate RM1 Million in the next 20 years
30% saving, will be able to accumulate RM1 Million in the next 18 years
40% saving, will be able to accumulate RM1 Million in the next 16 years50% saving, will be able to accumulate RM1 Million in the next 15 years
Finally if you are extremely keen on the calculation table, please email me. I'll send the table in excel format to you. So that you can play around using your own assumptions. Well you might want to start your initial investment with RM100k or your annual salary of RM50k, who knows?
