The Investment Policy Statement (IPS) , define one return and risk objective, while listing down all the relevant constraints (time horizon, taxation, liquidity requirement, legal, and other unique requirement). This will subsequently determine what portfolio can be invested into in the Strategic Asset Allocation (SAA).
Few assumptions:
i. Malaysia Inflation Rate to be 2.5% per year. (last 10 years average, 2.38% see calculation here.)
ii. Salary to be rise at 5% per year.
iii. required living expense per month to live comfortably = RM 2,000 in current ringgit.
iv. Malaysia income tax rate unchanged.
v. EPF average return to be 5% per year.
vi. Life expectancy to be 85 years.
vii. Will retire at 60 years, as current statutory minimum retirement age.
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The first thing to know, is to calculate how much you need to sustain the living standard for 25 years after retirement.
This can be done by summing the Present Value (PV) of all future expense at age 60.
I figure i would need RM 4631 per month starting age 60 for minimum standard of living (equivalent to RM 2000 that current ringgit value and 2.5% inflation rate).
This translate to RM 55568 for the first year, and total PV of next 25 years expense to be RM 1.05 million (assuming constant rate of return of 5% in EPF)
Ie, i would need to have RM 1.05 million by the age of 60 to ensure enough saving for retirement.
I figure if my current salary to keep rising at 5% per year and EPF rate of return to be 5% per year, i would have roughly RM2.2 million by age of 60. Which means, except regular EPF contribution, i do not need to save anything now from my current salary.
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Hence my IPS will be
Return Objective : after tax 5% per year (nominal)
Risk Objective:
Ability to take risk - High ( as i am currently still young , with stable income to sustain living)
Willingness to take risk - High
Constraints:
Time Horizon - Long (more than 15 years)
Tax consideration - as Malaysia dont tax capital gain nor dividend income, there is less concern here.
Liquidity requirement - Not applicable for the moment. ( or one month expense to sustain living until next salary banked in)
Legal - Not applicable for the moment.
Unique requirement - Not applicable for the moment.
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Things will get complicated when I need to save for marriage, save for first home, save for emergency medical fund when i get old, save for some desires in my life etc. This will be address later when i subsequently revised my IPS and setting saving goals.
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