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Why You Should Start Saving For Your Retirement In Your 20s

Have you ever wondered about things such as personal finance and investments? In this new series on #MoneyMatters, Crunch is partnering with StashAway Malaysia the digital wealth management platform powered by a data-driven investment framework — to teach you how to understand and manage your personal finance and achieve your financial goals.

In the previous part of this series, we’ve discussed investing basics in greater depth and 4 things to look out for when deciding whether or not to invest.
This time, let’s dive into why we should start saving for retirement in our 20s.

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You’ve just turned 25, and you’d like to retire when you’re about 65 years old – 40 years in the future. When you’re in your 20s, retirement seems so far off that it hardly feels real at all. In fact, it’s one of the most common excuses people make to justify not saving for retirement.
Although it sounds like a very long stretch, it is advisable to start saving in your 20s to have a comfortable retirement.
Before we dive into the big numbers and do the maths, let’s get on the same track and understand what retirement is and why it’s so expensive.


What is retirement?

Different people define retirement differently. Some call it “financial freedom” – the ability to live the lifestyle you desire without having to work or rely on anyone else for money.
Essentially, retirement refers to the time of life when one chooses to permanently leave the workforce behind.
When that happens, income is cut off. Consequently, many don’t have adequate retirement savings needed to sustain themselves throughout their remaining years.


Why is it so expensive?

One word: Inflation.
On an individual level, the inflation rate affects how much your retirement dollars will really be worth. Over time, it can take a serious bite out of your nest egg.
The primary concern for retirees is how inflation affects their purchasing power. This is true even if inflation remains low because seniors are more likely than younger consumers to spend money on things that tend to increase in price, such as healthcare.
So, how can you plan for this phase of your life?

1. How much money do you need?

Source: StashAway Asia
To give you a better idea with figures, let’s say that you’re 30 years old, want to retire at age 65 and expect to live at least 20 years after retirement (age 85).
With an income of RM10,000 per month, the rule of thumb is to take 70% of your salary to use every month when you retire. With a 3% inflation rate, your monthly retirement income needs would increase to RM16,414 just to maintain the same standard of living you enjoy today.
As the inflation rate fluctuates each year, the figure is expected to increase as well.


2. Where will the money come from?

Employee’s Provident Fund (EPF)
The EPF (or KWSP in Bahasa Malaysia) is a Malaysian government agency that manages a compulsory savings plan and retirement planning for private and non-pensionable public sector employees.
The EPF functions through monthly contributions from employees and their employers towards saving accounts. While in savings these funds may be used in various investments by the EPF or, in some cases, by the members themselves.
There are several benefits to contributing to the EPF, namely:
  • The EPF, by law, has a minimum dividend rate of 2.5%, but historically has had a much higher rate. For example, in 2014, the dividend rate was 6.75%.
  • Your EPF contributions are tax-free up to a maximum of RM4,000 per annum, since they are deducted from your chargeable income for calculation of income tax.
Would your EPF account help you comfortably coast into your golden years? For most of us, the answer is a resounding no.
Sadly, only 18% of EPF members meet the EPF’s (very) minimum savings target. This means that the majority of Malaysians will need to rethink their retirement finances.
Other investments
As EPF likely isn’t enough, it is vital to invest for your own retirement.
Source: StashAway Asia
Of course, when you invest in stock, you’ll probably see drops in the short term. That’s why the market is generally a no-go if you need the money within five to 10 years.
But history shows us that, in the end, you’ll come out ahead for long-term financial goals such as retirement.
One reason why investing in your 20s is so important is that you’re looking at a very long term, which allows you to capitalize on all that growth. Plus, if you have fewer commitments, you are also more capable to take higher investment risks as compared to 10 years down the road.
To combat the lack of retirement savings, the Private Retirement Scheme (PRS) was introduced in 2012 (regulated by the Securities Commission Malaysia); sought to encourage people to build their retirement income in another way beyond EPF. It is a contribution pension scheme which allows people to voluntarily contribute to an investment vehicle for the purposes of building up their retirement fund.
The PRS funds offer a packaged mix of underlying asset classes that provides growth, moderate and conservative risk and returns depending on which stage of life you are at towards retirement.
One of the perks of investing through the PRS is that you will also be able to enjoy a tax relief of up to RM3,000 per year too!
However, don’t mistake this as a substitute for the EPF scheme. The PRS complements the EPF, offering individuals the ability to build another fund that they can tap into when they retire, rather than relying on EPF alone.


Even if retirement is not on your radar yet, it’s important to start saving for this potential milestone early; the more time you allow your money to grow, the easier it may be to pursue your goals in the future. Check out this article on money-saving tips so you can channel a portion of your savings into investments!
If you’re looking to start investing your wealth at a low-cost with risk-managed portfolios and ETFs, you could start with StashAway Malaysia. We have a special offer just for Crunch readers too! Sign up with this personal invitation and you’ll get a 50% deduction of fees for your first RM100,000 invested for 6 months!


Three words to describe Ju Lene: passionate, driven, and... hungry. She's a journalism undergraduate who's enthusiastic about making an impact with great stories.

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