Mathematics of Long Term Personal Savings - 2

Continuing the series from the last article here.

Recap Summary

• The graduate is 22 year old when starting work as a professional in a multi-national organization.
• Work for 38 years (age 22, retire age 60)
• Starting monthly salary of 3.5k in the first year, and eventually end with 30.3k monthly salary at age 60 in the final year.  
• Total salary received over working lifetime ~ RM8m
• Saving 20% monthly salary in EPF for 38 years (assumed to earn 6% p.a. long term) gives the final accumulation at age 60 of RM4.6m.
• Saving a further 10% monthly salary in a self managed stock portfolio (assumed to earn 10% p.a. long term), despite only half the EPF savings, gives a final accumulation at age 60 works of RM4.9m, bigger than EPF.
• The total combined savings of 30% of monthly salary every month for 38 years will accumulate to the sum of RM9.6m at age 60.
• This is roughly equal to 26 times final annual salary.
• The  amount should be able to last the retiree and partner for a lifetime, assuming both lives up to age 100.

Education Spend - say RM1 million

Imagine a scenario where the parent of the child is thinking to spend RM1 million, to send the child to overseas to study.  

• Assume study period is 5 years (1 year matriculation, 4 years university, or 3 years Bachelor's degree, 2 years Masters/higher degree).  
• Let say total costs is RM1 million for now.  If your actual number is different, you may pro-rate / scale this number up or down.
• Actual amount will differ, and will vary depending on many factors.

The question is - how much will RM1 million today accumulate to 38 years and to 43 years (add another 5 years), if saved in EPF to earn 6% p.a. interest instead?

The answer may shock you!

Just 38 years of accumulation (starting at age 22) at 6% p.a. interest turns the RM1 million today into RM9.7 million at age 60!

This accumulation is LARGER than the graduate working, saving, self-investing for 38 years!

Saving RM1 million in FD

If you are a salaried person planning for your child's future education, how long will it take you to save RM1 million in FD?

Recall the previous article which assumes the same graduate saving for RM1 million.

This is not identical, but assume the parent saved 30% of their monthly salary into FD.  The table above showed that it would take up to 19 years to be able to save RM1 million.

What if the education spend is halved to RM500,000 instead?

1. It would take the parent around 13 years to save, if the parent salary progression is the same as the graduate child.  (it takes longer for compound interest to work).

2. The investment of RM500k over 38 years in EPF will grow to half of 9.7m, i.e. RM4.8m i.e. half of the child's accumulated retirement savings after 38 years of working, saving and investing.

The Question

Knowing these financial mathematics, would you reconsider saving for 13/19 years, to accumulate either RM500k/RM1 million, so that in 13/19 years time, you are able to afford to "invest" in your child's education?

How much of the RM500k/RM1 million is really an "investment"?

What is the ROI / outcome of the "investment"?

Is the outcome really an investment if to match the EPF savings, it will require the child to work for the next 38 years, saves 30% of monthly salary for 38 years, invest and learn self-investing for 38 years, in order to accumulate a final amount 38 years later to equal the alternative of "Do Nothing but invest RM1 million for 38 years in EPF".

How much of the RM500k/RM1 milliion really is an "investment"?

The Reflection

For those of us who received overseas education 3-4 decades ago where the cost of overseas education was extremely cheap and when the Ringgit was so much stronger, studying overseas was a viable option to more Malaysian parents back then.

However, today, when the Ringgit has weakened so much, and the cost of overseas education has risen faster than normal inflation, is sending our child overseas still a viable option as before, or only available to a constantly reducing group of hardworking Malaysians barely making into the elite group?

Clearly the world and Malaysia today is no longer the same as 30-40 years ago.