Monday, February 20, 2017

Can you retire on RM300k in Malaysia?

Hey, what’s crackin’ my value investing homeboys. You and your friends probably had discussions at mamaks or hipster cafes about how much investable assets you would need before you can quit your job to pursue your passion (whatever the fuck that is). That figure could be RM500k, a million, or more depending on how baller your lifestyle is. But to accumulate RM500k or more in investable assets indicate some degree of successful financial planning. But what about the guy who didn’t give much thought about retirement until one day he realized his erection isn’t as hard as it used to be?

Update on the Greedy Dragon portfolio: I recently sold 50 shares in Natural Resource Partners for USD 40.80 per share. I still own 200 shares in Natural Resource Partners.

Let’s call our carefree, live for the moment kinda guy Ah Chong (the most generic Malaysian Chinese name ever). Ah Chong is just your average guy earning an average salary. Therefore, he has average EPF savings. In 2015, EPF active members’ average savings at age 54 was RM194,438.37. This doesn’t include EPF’s annual dividend, so it’s more like RM206k if we assume a 6% dividend. Ah Chong wasn’t into the whole savings thing in his younger years. He bought a Japanese car the moment he saved up the down payment, and has been changing to a new model every 5 years or so. He always had the latest phone and a Prada wallet like every other fucking yuppie. Ah Chong regularly visits a KTV lounge and makes 2 trips a year, one to Genting and another to Bangkok. Playa gotta play, right? Thankfully, Ah Chong was nagged into buying a house by his parents. Ah Chong got a wake up call in his mid-forties when some leng lui called him “uncle.” Since then he managed to put aside about RM100k.

A quick disclaimer: I’m not a professional financial advisor, I’m just an asshole that no one wants to employ. Nobody should take anything I say seriously as there’s a chance that I will get some things wrong.

The first order of business for Ah Chong would be to set aside some money in fixed deposit for emergencies. So, let’s say he allocates RM20k for a fixed deposit that pays 3.5% a year. According to data I got from Ringgit Plus, at least 4 financial institutions offer interest rates of 3.5% or higher depending on stuff like deposit period, your age and deposit amount. Ah Chong then splits the remaining 280k evenly between bonds and quality dividend paying stocks. You need them stocks as they have the potential to increase earnings and, therefore, their dividends to help you keep up with inflation. You need bonds as they can be a  more reliable source of cash flow than stocks. If you're interested in bonds, you can check out my article bonds is love, bonds is life.

Considering that Maybank has a trailing twelve month dividend yield of 5.9%, I think it’s quite likely that an investor can put together a stock portfolio with a dividend yield of 4.5%. Disclosure: I own shares in Maybank. I believe an investor in Malaysia is able to get a distribution yield of 4.7% by investing in bond unit trusts*. So, this would leave Ah Chong with a portfolio yield of 4.53% which would in turn give him an income of RM13,580 per year or RM1,131.66 per month.

*I looked at data from 6 different bond unit trusts. They had yields of between 4.17% and 6.88%, and an average yield of 4.97%. I adjusted the 4.97% down to 4.7% to take into account any sales charge. I calculated the yields on my own which differs from the yields displayed on the factsheets.

Assuming he spends RM500 a month on stuff like electricity, internet and petrol, that would leave him with about RM20 a day for food. That would suck for a wide fella like me who loves good food, but I guess it’s workable if you’re thrifty when it comes to food. Ah Chong will have to go to government hospitals if he needs any significant healthcare. He would also need to pay for stuff like car insurance, road tax, property assessment tax and homeowner insurance. Let’s say that all these things come up to RM4k per year. Let’s assume that the stock portion of his portfolio appreciates by 3% per year, and he sells stocks equal to his capital gains. That would allow Ah Chong to increase his yearly income by RM4,200. So, it seems our boy got things covered, right? Well, not quite. First off, he impairs his portfolio’s ability to keep up with inflation whenever he sells stocks. Secondly, stocks don’t always go up, there will be negative years.

Can’t Ah Chong just dip into his principal to combat inflation? Let’s assume that stocks go up by 3% every year like clockwork, which brings his portfolio’s return up to 5.93%. How long will it take for him to deplete his retirement fund if he increases his year 1 annual withdrawal of RM17,780 (13,580+4,200) by 3% a year. After plugging in the numbers into some Excel model I got online, it would appear that our man will run out of money within 22+ years or when he’s 77 years old. With medical advances being able to turn us into fucking RoboCop, I think that there’s a good shot that someone would live way past the age of 77.

Maybe a single guy like Ah Chong could really retire with RM300k in investable assets if he further reduced expenses such as giving up his car. But I think he would be cutting things a little too close. Ideally, you would want a retirement portfolio that generates income significantly above your expenses so as to give you a margin of safety from shit like recessions and periods of high inflation. Dipping into your principal should not be a common occurrence, it should only be done in the down years when the income generated can’t cover your expenses. I know, I know... things don’t always work out the way we want.

I would advice Ah Chong to continue working until he is at least 60. Without even counting additional EPF contributions, his EPF savings would grow to around RM275k assuming EPF pays a 6% dividend in each of the 5 years. He should also work after he is 60 (maybe he can help his best friend Ali sell nasi lemak kukus at night). It would help his finances and keep him mentally active. You get self-esteem from working and being productive. You don’t have to give that up just because you hit a certain age. Take it from me. I desperately want to work, but so far nobody wants to give me a chance. Aight guys, I’m bouncing. Thank you for reading. Take care and stay rational.        

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