Time Value of Money (Exercise)

Assuming that you are 40 years old now and you intend to retire at the age of 65 and you and your wife will lead a retirement life. According to the mortality rate, you think you probably will die when you are at the age of 80, but you feel that it is prudent to plan financially another 5 years after that. This means you are planning to have enough money to survive 25 years after retirement.

When you retire, you figure that you will be free of all commitment, children’s education, a house free of loan, you and your wife only needs money for the basic necessity; food, utility bills, transportation, health care and some money for annual holidays somewhere overseas. You work out that with the present costs, you and your wife will need RM8000 a month, or RM96,000 a year of today’s money for this lifestyle. You figure that with 20 more years to live after retirement, you need 20 times the amount of annual expenses of the first year of retirement as your total retirement sum.

You have some saving now in cash and in investment of just RM30,000, and RM100000 in EPF right now.

Questions:

1. How much money do you need in nominal term for your monthly and yearly expenses when you retire, after taking the inflation rate of 4% a year into consideration?
2. What is the lump sum amount you need then for 20 more years after retirement?
3. How much your present EPS and cash and investment each will grow to when you retire?
4. What is your shortfall?
5. Assuming that your net return of all your future investment is 10% a year for all investment and future EPF, how much money (including your forthcoming EPF saving) do you need to save a year to build up your shortfall?

Please show clearly your computations.

 

You can click here to refer to the answer.

 

Summary of Answer:

(1)

Year	1	2	3	4	5	6	7	8	9	10
Yearly	255,920	266,157	276,803	287,876	299,391	311,366	323,821	336,774	350,245	364,254
Monthly	21,327	22,180	23,067	23,990	24,949	25,947	26,985	28,064	29,187	30,355

Year	11	12	13	14	15	16	17	18	19	20
Yearly	378,825	393,978	409,737	426,126	443,171	460,898	479,334	498,507	518,448	539,185
Monthly	31,569	32,831	34,145	35,511	36,931	38,408	39,944	41,542	43,204	44,932

 

(2) 5,118,406

(3) EPF at Retire      409,394 Investment at Retire      325,041

 

(4) 4,383,970

(5) 44,577

 

K C Chong (25 June 2014)

Data and Assumptions:

Age now	40
Retirement age	65
Years to retirement	25
Age die	85
number of years of retirement	20
Rate of inflation	4.00%
Return of investment of savings before retirement	10.00%
Return of existing EPF	5.80%
Current EPF amount	100000
Current amount in cash and investment	30000
Present monthly expenses	5000
Monthly expenses at retirement at today's RM	8000