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34

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.

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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

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my goal quickly and more effectively?

Thank you.

hope to hear from you

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and w ill never be shared

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. Whats 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. Lets 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. Thats 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

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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

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should be OK, dunno why people invest very little as RM100 per month only.

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After having enough experience oversea, I think I will be able to find a job with good salary when I

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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.

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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

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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

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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

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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.

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Then I bought

All About Mutual Funds

My Books

, 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, lets get a clear picture of his retirement journey, as shown in Figure 1

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Figure 1: Illustration of Sams 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? Lets 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 cant 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 todays
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. Lets 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!

Sams 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? Itll require another post to discuss this matter. I
learn that Warren Buffetts 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?
Do you think Sam can make it? After 8 years time, I wish that I can write a follow up post about
Sams financial situation.
[poll=12]
We would like to hear your opinion in the comment.
More articles on retirement:
Only 5% Ready for Retirement in Malaysia
$10 to $1 million: How long does it take?
Technorati Tags: retirement, fresh graduate, retirement planning, financial freedom

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41 Comments

Relax

Com m ents

Trackbacks

August 14, 2007

Reply

Thanks for sharing! This post is worth treating you a cup of coffee
I think the analysis is very well done. The calculator is priceless! Thanks for sharing that
Personally I think Sams prediction and calculation is rather conservative. It seems like he
chooses the worst case scenario figures to predict his financial journey. He places his
goal high up with modest input. Most likely 8 years to 10 years is the longest possible time
to reach his goal. I think if the figures are raised slightly optimistic, I believe 8 years is a
realistic time frame.
Most likely Sam has to sacrifice a bit when he is young. No car / No house. When he gets
older and more stable financially, he can buy those stuffs. This is the hard choice he has to
make.
If he learns more about yielding more profit from his investment, and if the market is strong,
this will help him reach the goal even faster.
I think when he reaches his goal, he might have to re-plan his portfolio so that a part of his
investment will continue to grow.
Overall I think Sam needs to learn more about the technical part of investing, like what you
mentioned about over 20% per annum. He needs to be disciplined and consistent as well.
Your Money or Your Life is a good book on finding higher income and keeping expenses
low. I like that book.

Relax

August 14, 2007

Reply

.
.
.
hmmm However, if we consider taxes, 5% load, 1.5% management fees.
There would be some set backs.
I think taxes on Mutual Fund profit is something complicated.

Anonymous

August 14, 2007

Reply

Bravo to Sam and KCLau !!

The road to financial freedom is paved by determination and discipline.
One thing to point out about the investment return,
that the average return for mutual fund is merely about 10~12% over long-term records, 15%
is kinda optimistic to me.
(to get a better conservative view of fund return, we could ask the insurance agent about the
projected return of ILP funds, they do give achievable rate by based on how ur combination
on equity, balanced and bond funds)
Regarding the magic 25% p.a record of Buffet, we hav to understand that he is nobody like
us, he invest directly in stocks, private firms, go through period of time when bonds are
offered in double digit return. plenty of free float money channel in every days and
desperately thinking to optimizing the efficiency of the $$$. we dont, do we? unless we
invest in stocks and not gamble on it.
since Sam determine to achieve his financial goal through unit trust and start investing with
such lump sum of money. I encourage him to learn switching funds along his journey. once
he become Mutual Gold member (>rm100k invest), the switching fee is waived. so learning
to use it wisely, make the $$$ circle and work harder within the mutual fund system.
once Sam reach that day, he hav to plan another strategy to manage his asset then. equity

funds are heavily affect by market fluctuation, sam might need to stack up another few $$
as buffer to survive through market downturn in future. those emergency fund should be
enough for at least one year expense and wholly kept in safer place like bond funds. (or
better deal, try enhanced bond then switch to select bond/money market when the rainy
days come)
best wish to all

kclau

August 15, 2007

Reply

@ Anonymous
we can see that you are a very experienced investor. Thanks for you kind input.

Relax

August 15, 2007

Reply

I am grateful to learn something new from anonymous and KCLau

CYH

August 19, 2007

Reply

What would your recommendation be to acheive a 10-12%p.a. and 15%p.a. return?

Chinaman

August 27, 2007

Reply

All plan no action means nothing, I totally agree. Personally, I have simple questions that
can be put to test right away. When coming to financial matters, do you always live below
your mean? Were you known to your peers or friends as someone who do not know how to
enjoy the better part of life? Were you publicly looked down most of the time because you
have stuffs either long time expired but still usable or out of fashion radar? Do you always
someone who think how you should decrease your expenditure while increase your saving
ratio?
If you are that sort of person, give yourself a pat on the back. Attitude, patience, humility
and mental strengths are considered the necesary tool sets instead of mere investment
knowledge.
Theres no point knowing so much about investment matters while spluring long term hard
gain for short term gratification.
Coming back to the question, whether someone can retire in 8 years depend on how much
he/she willing to sacrifice all good things in life for a better tomorrow? Then again, theres no
point achieving the goal and later spend like theres no tomorrow. BTW, 15% return seems
all fairy tale to me. Even theres one, time factor is still another leverage but defintiely not 8
years. OKOK, there are some investment portfolio which achieve so but its almost nonexistent for low-risk-high-return category. Take note high risk does mean, someone could
lose all the golden eggs with the throw-in basket.
In my financial dictionary, if you have a cent more to spend, you have a cent less to save.
Financial matters to me is always zero sum gain. Everyone talks about high investment
return but it means nothing when the money is consumed rather than compounded.
Theres no point talking about early retirement while we do not plan to change our
immediate living style.
The Millionares Next Door book, summed it aptly by saying millionaries studied in US
context live frugally or simply below someones mean.

Carnival of Smart Money #1

August 29, 2007

Reply

KCLau presents How A Fresh Graduate Plan to Retire in 8 years posted at KCLaus
Money Tips, saying, A committed fresh graduate tells his story about his desire to plan
for retirement as soon as possible.

John

October 19, 2007

Reply

4k per month is not enuf for u after 10 years, how about ur house loan and other loans?

KCLau

October 19, 2007

Reply

loan is a matter of choice. If Sam doesnt get into any debt, I cant see any problem why 4k
is not enough

renaye

October 23, 2007

Reply

a very interesting question and answer since im also a fresh graduate planning to retire
young.
although sam has planned rigidly on his financial life, he didnt seem to include other
expenses like what kclau has stated: marriage, car, house, etc.
unless sam plans to retire at 40 which is a much more practical retirement age for his
portfolio. or unless there are other alternative investment that can help him to achieve his
target amount at the same time paying off his housing, car loan and support his family [if he
has them].

Malaysian Oz

January 28, 2008

Reply

I am very-very sure Sam will achive his goals less than 8 years. Ive went through same
situation as per what Sam planning for.

Smart Money

May 10, 2008

Reply

The use of monthly compounding with an annual rate of 15% is flawed. This assumes that
additional money can be reinvested at 15% which is not the case. Normally, annual rate of
return is used for annual compounding only. You need to convert the interest rate to a
monthly compounding rate.

Doug

December 23, 2008

Reply

i dont think that he can do it in 8th years time.This is obviously not an easy task.there are
still a lot of thing he has miss on the plan,like others commitments,insurance and
properties.this is the main obstacle that may pull him down.however,if he is manage to
follow the plan with a super strong willpower, this should be achievable.there is one thing he
has to take into the consideration,that is the external factor like retrenchment.even though
this is something we can not expected,i think he should get ready for this issue as
well.GOOD LUCK..SAM

KCLau

December 24, 2008

Reply

@Doug,
As you said, I think that Sam needs extraordinary Willpower.

limsan

January 15, 2009

Reply

Lets say you can really retire in 8 years time with loads of money
After 5 years without working, your brainll become rusty and all your money will go to
waste
Get a life dude!

LOKE

April 2, 2009

Reply

I dont think Sam can make it as 15 % per year is too high and not realistic. However, he
has a good attitude we all should learn. We all should save a very big portion of our income
now if we want to live comfortably in the future. This principle is called delay gratification

which is the key to financial freedom.

Eu Ginn

April 15, 2009

Reply

June 13, 2009

Reply

@ limsan
Life is more than the work in your job.

Benson

D determination is good but in my opinion, why nt invest money in true business which
require financial expertise also. From the money that we earned from certain business, we
can invest much more steadily in stock, unit trust and so on. Wouldt it better than just be
rather stressful to save Rm1k from estimated salary Rm4K.

Shogun @ Financial Samurai

August 20, 2009

Sorry buddy, but you dont make enough money to retire at age 30

Reply

Unless, you want to

live like a popper! How did your investments treat you last year?
Shogun

UFB

January 28, 2010

Reply

Yo sam it great thinking.. but one think before u do all the planning on your none existing
money.. i advise u to focus on your current habit on money now!
How well u manage your money now. Because when u start manage ur money then only u
can have more money not vice versa bro! I recommend u to read this book T.Harv Eker
Secret of Millionaire Mind Set.

Jeff

February 18, 2010

Reply

A 15% growth in your investment ? Some of the best dividend stocks in KLSE do not give
such return.you must be joking !

Ed

April 21, 2011

Reply

Hello everybody,
Correct me if I am wrong. But based on the comment above, 15% growth seems
unachievable in unit trust?? Is it true? Have you invest in any fund house and manage your
portfolio?
For myself, i have seen many of my investors earn more than that during good times and
most of the cases were from of lump sum investment without proper management. As for
the bad time, the gainers were belongs to those investing with right strategy and proper
allocation.
IMHO, if you invested in stock to earned solely on dividend, the chances are definitely slim.
With unit trust on the other hand, it have varieties of choice(funds) which involved the same
stocks that you might be interested in and this will allow the investor to do allocation and
spread the risks.
However, all of these actually depending on the investor risks appetite and the objective of
investing. If a person is very emotional type, i.e whose jumping up and down when the
market goes down, the best is to placed the money in something conservative. But if the,
person truly the understand the fundamental investing which required certain time frame and
professional assist (somebody like KC

anna

), then 15% is definitely can one lah.

June 25, 2011

Reply

thanks for the sharings. i couldn explain how much this cmmments and sharing have gave

me solution for my thoughts and fuure plans. superb ! and amazing

luck

good job and good

god bless!

sEnGz

April 19, 2012

Reply

I salute Sam for his determination but I personally feel that the estimated return is too ideal
and wont come true. Furthermore, to be realistic, how many of us have RM80k at hand
when we are 26 years old? Many of us have study loans to pay off upon graduation. Does
that answer your question on why some of us only invest RM100 in MF during the initial
stages of our working life?
Nevertheless, Im sure we can find areas in the article which we can adopt in our
REALISTIC life. Good luck Sam in pursuing your target.

shooke

February 1, 2013

Reply

All the best Sam. I know with great determination and knowledge you will be able to achieve
it as i have seen people done it before.

Khek

March 6, 2013

Reply

Im just itching into find out, if KCLau, would you be able to kindly find out from our dear
friend, Sam, if he has managed to stick to his plan, and work his socks off?
Furthermore, the posts were made just before the 2007-2008 financial crisis, and assuming
he did invest during then, and now that the economy has generally recovered, he mustve
clearly obtained returns above 15% and perhaps retired already?
311k 374k is the goal, and its relatively likely that he has punched through that. Keep us
updated with a post on this, would be awesome!

Jacqueline

May 3, 2013

Reply

Hey, i second Khek is there any way of finding out Sams progress? by the way thanks for
this will try to apply it to myself as well

Zfs

August 10, 2013

Reply

If he knew that much about personal finance at the age of 25 before even started work, im
quite sure his determination, knowledge and perseverance is already well above the majority
during that age(by reading most of the comments). Even if he flunk once a while or be it
there is economic downturn he will still be much better off than his peers. If he is still in the
game, im sure he has gain more insight in this personal finance game, which im eager to
hear it out.

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