We All Need to Become Millionaires

PERSONAL INVESTING

By OOI KOK HWA

One must have cash reserves of about RM1mil to be able to maintain one’s current lifestyle 20 years after retirement

WE need to become millionaires when we retire! A lot of people have misconceptions about being millionaires. To them, being a millionaire means they should own total assets – by adding up their total cash, house, Employees’ Provident Fund (EPF) contribution and car – that are worth RM1mil and above.

They believe that once they achieve one million cash, they should enjoy themselves by driving big luxury cars and staying in bungalows.

In reality, all of us need to become millionaires when we retire at age 55. Based on our computation, we need to own total cash, including all money in savings, fixed deposits and EPF, which have total value of more than RM1mil.

The key principle here is we need to have cash reserves of more than RM1mil to be able to maintain our current lifestyle 20 years after retirement from age 55 to age 75. This is on the assumption that we can live up to 75 (the average lifespan of Malaysians).

Based on our computation (see table), if you are now 35 years old and your current monthly expenses are RM3,000 per month, assuming you are only able to generate a return of 3% (the return from fixed deposits) on all of your savings and the RM3,000 will grow by the average historical inflation rate of 3.5% per annum, you would need RM1.6mil when you retire at age 55.

This amount will be enough to maintain your current lifestyle for the next 20 years after your retirement at 55.

However, if you need to spend RM5,000, RM7,000 or RM10,000 per month, then you need RM2.6mil, RM3.7mil and RM5.3mil respectively at your retirement age of 55.

In short, you need to become a millionaire when you retire even if you only maintain a simple lifestyle after your retirement. You will not be able to use this money to buy a big luxury car or a bungalow, as you really need the money for the next 20 years.

Thomas J. Stanley and William D. Danko have conducted research on the reasons why some Americans become wealthy. They discovered that a lot of them live well below their means.

Unfortunately, we notice that some Malaysians do not have enough money when they retire. Some of them may not be aware that they really need to accumulate that amount of money when they retire. Some may be aware, but they may have used up all their savings to support their children’s education. As a result, they need to find a job after retirement.

Some may have difficulties finding a job. A lot of companies may prefer to employ a young graduate rather than a retiree unless the latter is willing to accept a lower pay.

We also believe that a lot of investors are quite worried about having enough money for retirement. They are also concerned that their money may not be enough to protect them against inflation. Hence, besides controlling our expenses, we also need to know how to grow our money.

Looking at the table, different minimum achievable annual target returns can provide different required amounts for retirement.

For the current monthly expenses of RM3,000, if you are only able to generate a 3% return per annum, then you need to have RM1.6mil for retirement whereas you only need about RM900,000 if you are able to generate a return of 10%.

However, higher returns come with higher risks. We need to understand our risk tolerance level. We need to equip ourselves with adequate investing knowledge if we intend to generate higher returns.

Man Held Over ATM Cash Trick

The Star - Friday January 23, 2009

JOHOR BARU: A man with a history of drug offences thought he had discovered a simple and fool-proof way to double his money quickly.

His method involved cutting a RM50 note near its reflective strip and joining the two cut pieces to pieces of white paper, thus creating two tampered RM50 notes.

He then deposited the tampered notes into an account via a cash machine and later withdrew two genuine RM50 notes from an ATM machine.

His plan worked and to escape detection, the man travelled from Kuala Lumpur to Johor to deposit the tampered notes in banks in Permas Jaya.

Then he got greedy and deposited too many of the tampered notes, causing the cash machines to jam. Sources said bank employees later found dozens of the tampered notes when they checked the cash machines.

Johor police with the assistance of their Selangor counterparts arrested the 40-something man in Petaling Jaya several days ago.

Police are trying to ascertain whether he was involved in other counterfeit cases elsewhere.

The banks are also doing their own internal audit to ascertain why the cash machines were not able to detect the tampered notes.




Editor's Note: Maybe someone who has the pic of the tampered note can share with us here.

Investment Advice

Stick to basic investment in asset classes, that is, genuine companies that use these commodities for real markets, real products and real profits.

EPF Dividend Rate Compared Against Inflation

Kumpulan Wang Persaraan Malaysia (Employees Provident Fund)

EPF statute promises to pay their clients minimum 2.5%

EPF Dividend History

1952 - 1959 = 2.50%

1960 - 1962 = 4.00%

1963 =5.00%

1964 =5.25%

1965 - 1967 =5.50%

1968 - 1970 =5.75%

1971 = 5.80%

1972 - 1973 = 5.85%

1974 - 1975 = 6.60%

1976 - 1978 = 7.00%

1979 = 7.25%

1980 - 1982 = 8.00%

1983 - 1986 = 8.50%

1987 - 1994 = 8.00%

1995 = 7.50%

1996 = 7.70%

1997 - 1998 = 6.70%

1999 = 6.84%

2000 = 6.00%

2001 = 5.00%

2002 = 4.25%

2003 = 4.50%

2004 = 4.75%

2005 = 5.00% 

2006 = 5.15%

2007 = 5.80%

From a tabulation table, basic minimum is shown below.

Call me old school, but I would still advise that everyone to keep the invesment intact, since it is for your future. While EPF protecting the principal and minimum distributions of 2.5% you would never miss a thing. If you need to invest or purchase anything, set up another fund.

(This is simple article just to share records of EPF distributions for reference)

ASNB Fixed-Priced Unit Trust Funds a Hit With Investors

My comment can be read below after the article.

The Star Online > Business
Monday December 15, 2008

ASNB Fixed-Priced Unit Trust Funds a Hit With Investors

By LAALITHA HUNT

AMANAH Saham Nasional Bhd’s (ASNB) fixed-priced unit trust funds launched in the past few years have proven to be big winners due to their commendable returns.

These equity-based funds, namely Amanah Saham Wawasan 2020 (ASW 2020) and Amanah Saham Malaysia (ASM), have achieved compounded annual growth rates of 10.78% and 6.3% respectively since the time of its launch.

ASW 2020 and ASM have been providing an annual average distribution income of 7.74 sen and 7.12 sen respectively.

To paint a clearer picture, say if an investor had placed RM100,000 in ASW 2020 10 years ago, his investment value would amount to RM251,360 today.

Similarly, by placing the same amount in the ASM fund 10 years ago, the investor would have RM173,340 today in his investment account.


ASM was launched on April 20, 2000, with an initial fund size of two billion units which were fully subscribed in 21 days.

ASM undertook its first increase in fund size two months later in June 2000 with one billion units fully subscribed in four months.

In April 2006, one billion units of the ASM open for subscription were fully subscribed in 45 minutes.

The most recent offer of ASM’s additional units was in July 2007 which saw all the 500 million units, capped at 50,000 units per investor, fully taken up in 30 minutes.

Earlier in March 2007, a total of 800 million units, also capped at 50,000 units per investor, were fully sold out in one day.

ASW 2020 also drew strong response for its subscription quota for non-bumiputra investors since its launch in August 1996.

Besides the notable payouts, both these funds have fixed prices at RM1 per unit unlike other unit trust funds, which is an attractive feature for risk-averse investors.

According to an analyst, ASNB’s strength lies in the fact that it manages a big fund and has the luxury of time.

“These two factors are crucial to beat the market at any time,” the analyst added.

To date, the fund size for ASW 2020 and ASM stands at 10.42 billion units and 7.2 billion units respectively.

This includes the additional one billion units each offered to the public last month for both these funds. In comparison to these fixed-priced unit trust funds, ASNB’s variable priced balanced fund, Amanah Saham Nasional 3 (ASN 3), did not perform as well.

ASN 3, which has a fund size of 112.91 million units, only registered a compounded annual growth rate of 3.7%.

My Comment:

I prefer ASB which gave good and consistent distributions almost every year. It's compounded interest for 15 years based average 7% is 11.92% and at the same time also invest into Amanah Saham Nasional (ASN) and 15 years based on average 5.88% is 9.5% - I worked this on estimation and history and tracked record for the past 3 years and extrapolated to 15%. (I shall later, updated with correct average and compounded interest after I extract its data from ASB and ASN historical records.)

Friends advocate me to join other houses as well, I know - to reduce risks, I am therefore better to have a few good funds and diverse my money.

But, I am the believer of consistency and focussing on certain fund to avoid over-lapping investment into same category of fund as well as to avoid over-diversified and losing my focus on its horizon.

Those common mistakes I've seen is that, investors do not project  vivid horizon and target of a particular fund. They always missed this:

1. Horizon : How long they want to invest and preserving its capital.

2. Cum distribution : At the end of their projected horizon, how much do they expect distribution that they can take out (using capital preserving model).

3. Total unit holdings : Which reflected in (1) and (2). So, they know how much they need to invest, regardless any method they want to use during invesment period.

4. Over-diversified : Where investors hold to too many funds that they lost focus for (1) and (3).

Unit Trust - Question on Return of Investment

Have anyone ever question this situation:

One decided that he wanted to invest into Unit Trust. So, he walks to a Unit Trust house, we named it Super Trust Bhd. An agent then proposed him to buy Super Trust Fund.

In his explanation, the revealed that Super Trust Fund, charging 5% for entry fee. For example, if he decided to spend RM1000 - Super Trust Bhd will take 5% that is RM50 out of that amount. So, he is only left RM950 to buy the Super Trust Fund.

The agent explain further, Super Trust Fund has been in the market for 5 years and during the period has given dividend in average of 7% which sounds a lot to him.

The nice agent who offered him free drink then adds, every financial year Super Trust Bhd will charge 1.5% for management fee. That sounds little to him.

When he gets back home, he does few calculations.

1. He decided to spend RM1000 to initially purchase Super Trust Fund.
2. He already knows that entry fee is RM50.00 (5%)
3. End of each financial year, there will be 1.5% charge translated as RM15.00
4. Ok, average returns is 7%. He made a little assumption that price fluctuation deviation is very small and can be ignored.
5. From (1) to (4), he tries to determine net profit (return) from his investment.

His results:

1. For the first year: Profit 7% minus entry fee 5% minus management fee 1.5% leaves him only 0.5% of net profit.
2. If he decided not to buy or sell his holding for another year, the net profit will be 7% minus management fee 1.5%, leaves him at 5.5%

That sounds good, because it is good!

But, since Super Trust Fund's price is not fixed and it is fluctuated, he wants to consider Dollar-Cost-Averaging and he invest in fixed and orderly time manner. Again, he made assumption that price deviation is very small and can be ignored.

Year 1
Initial investment: RM1,000.00
Deduction: 6.5%
Balance: RM935
Balance brought forward after dividend: RM4.68 (RM939.68)
So, losses for the first year is RM60.32 (6%)

Year 2
Balance brought forward: RM939.68
DCA addition: RM1,000.00
Deduction - Entry Fee: RM50.00
Accumulation after Deduction: RM1,889.68
Deduction - Management Fee: RM28.35
Balance: RM1861.33
Dividend at 7%:
Balance brought forward after dividend: RM130.29 (RM1,991.62)

Year 3
Balance brought forward: RM1,991.62
DCA addition: RM1,000.00
Deduction - Entry Fee: RM50.00
Accumulation after Deduction: RM2,941.62
Deduction - Management Fee: RM44.12
Balance: RM2,897.50
Dividend at 7%:
Balance brought forward after dividend: RM202.83 (RM3100.33)

Only after 3 years, then he gets back his capital and dividend RM100.33 translated as 3.34% or average 1.11% a year.

Well, it sure seems that 1.11% per annum is below annual inflation rate...

So, I really like to ask - is Unit Trust really a good vehicle to ride on considering that fund houses in Malaysia (we have many: Public Mutual, ASNB, CIMB Principal, MAAKL, and lot more) charging high entry and exit fees which at some point above the particular funds annual returns?

This is something that no one really asking and want to look into - but still we need to consider the cost of our investment and do we really get a good returns as promised. When our returns below inflation rate - I really have nothing to say.

Anyone has to comment?

Ok, I shall add more discussion to this. At the mean time, do think about the calculation above and do you really "investing" in Unit Trust?

I shall write comparison Pros and Cons between investing in Unit Trust and Stock Market. But that would be later, when I have enough time to put things together.

Disclaimer: Figures and name here just for example and rough calculations only. I may be wrong in the idea of presenting it and I would be much appreciated if someone who has better "lights" and knowledge to share it with me. One more thing, I am not associated with any fund house nor selling or promoting any fund.

Fuel Price Reduction - Another 10 Sen

OK. Malaysian can now enjoy another 5% reduction which translate 10 sen from previous price of RM2.00 which perhaps may be a relief since it is another 2 sen lower than the price at the beginning of the year at RM1.92

But as the world's price going down, government may perhaps want to give true "price".

Seeing the price of fuel chopped and slashed many times, from RM2.70 to RM1.90 - about 30% - but we have yet to see consumer prices to go down as well.

The electricity tariff which was increased during the time may now returned to the previous price. The consumer dry and food products supposed now to follow suits.

But, we can only wait - since it is hard and rather difficult to see these prices to go down. Their tendencies to hike never know how to return downward.

So guys, I am cutting another 5% from my monthly budget for fuel and putting the saved to pay other killing debts - how about you?