Is It Possible To Retire At 45?

Now, let’s assume the following: 

You are 27 this year earning RM 5k a month. You spend RM 4k a month and this includes: 
1. RM 1.5k a month in mortgage installment or rent. 
2. RM 0.5k a month in car loan installment. 
3. RM 2.0k a month in other living expenses. 
This means you could save RM 1k a month or RM 12k a year. 

So, the question is: “Is it possible to have the ability to retire at 45?”.

The answer depends on several main factors. I’ll list them down and share what their impacts are towards attaining financial abundance. They include: 

1. Income Growth 

Understandably, at 27, it is easy to look at your current income & bank balances and think to yourself: “How is retiring possible?”. This is especially true when as a 27 year old, you are saving RM 1k a month. You could think RM 50k, RM 100k, … and any amount beyond is a million miles away. 

Such is normal but not quite right, especially if you’re a productive worker. 

Why? This is because your income should grow in line with the value you added to your clients or company. This value is either measured based on revenues, or based on how much costs and time saved from your work. So, let’s assume that your income grows at 5%, 10% and 15% a year. By 30, 35, 40 and 45, you would potentially increase your monthly income to:

Do you now feel much hopeful about your financial future? I hope so. Here, the thing is to keep a longer perspective when building your career. Firmly, I believe that we will 2x or 3x our income in 10-15 years time from today. This increase is the first key to making early retirement possible. But, it’s not the only key as we need: 

2. Savings Growth 

The more you earn, the more you can save and this allows you to: 
1. Spend + Borrow more. 
2. Save more. 
How you prioritize the three shall affect your level of wealth. 

For instance, let’s say you’re earning RM 10k a month, 2x your monthly income. Would you have an upgrade in lifestyle: expensive home, cars, … etc? Or, would you retain your current RM 4k a month lifestyle? Take some time to reflect. This is because how you perceive life and what wealth is can alter the course of your financial wealth and if you can choose to retire comfortably at 45. 

For example, if you view that a RM 10k monthly income earner should reside in a nice RM 800k well-furnished condominium, drives a swanky Japanese car, has the latest iPhone, goes on overseas holidays frequently and so on, it would be a lot harder to save money as you spend and borrow more. Let’s assume that you can still save RM 1k a month after all these spendings. After 10 years, you could save up RM 120k. It’s still a sum of money. But, does it allow you to retire? Such is quite hard. 

So, if your money pattern is like below, it’s hard to retire young and rich. 

But, what if you are already happy with a RM 4k lifestyle? You didn’t equate RM 10k income = RM 10k lifestyle. Here, let’s also factor in RM 1k in additional cost due to inflation and small pleasures in life. Hence, you can save RM 5k a month. In 10 years time, you have RM 600k saved up. 

Could you totally retire with RM 600k? Likely not. But, RM 600k could provide a huge degree of flexibility and freedom in terms of what, when, where, and who you like to work with. Such things contribute to happiness, don’t you think? But this requires you to adopt a money pattern as illustrated below: 

3. Returns 

Today, many are aware of the importance of investing but they don’t. Still, most keep their money (Ringgit Malaysia) in FDs in fear of losing money. 

This concern is valid as most are not trained to invest. However, if you can learn how to do so, it is possible to invest and build a portfolio of dividend stocks that yield around 5% a year. So, let’s assume you could save RM 5k a month and you use that to build a dividend portfolio. As you build your portfolio, you choose to reinvest all your dividends back into buying more dividend stocks. 

Assuming no capital gains or losses, in 10 years time, you’ll accumulate as much as RM 755k in dividend portfolio. At that time, your dividend income works out to be RM 37.8k a year or RM 3.1k a month. 

Can you retire with RM 755k in stock portfolio + RM 3+k a month in dividends + other assets (EPF, a house, other cash savings … etc)?

I won’t say that you would. But assuming that you have built such a portfolio by 40 years old, you’ll most likely feel confident about retiring if you want to. Here, you may consider semi-retirement, which is where you work because you enjoy your work and not because you are financially desperate. 

The above is possible even at 5% a year in dividend yields. 

The Ultimate Formula to Retiring Early 

So, back to where you’re at, I believe that it’s quite possible to strive and aim to have the ability to retire rich and early if you want to. The key to making it work is to create a synergy between the 3 factors discussed above: 

1. Focus on income growth. 
2. Channel them into more savings. 
3. Invest sensibly for sensible returns. 

The formula to go from earning RM 5k and saving RM 1k a month to building as much as RM 1 million in stock portfolio lies in this simple formula: 

1. Income Growth = 10% a year.
2. Savings Growth = 10% a year. 
3. Desired Returns = 5% a year. 

After 15 years of “10%+10%+5%”, you’ll have a chance of having RM 1 million. 

By Ian Tai investment expert with KL Lau Blog

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