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I don’t know about you, but I am getting a little tired of the constant COVID-this and COVID-that coverage in the news, so just so I can remember what life used to be like before everything went all coo-coo-ca-ca, let’s do a reader case for old time’s sake!
Hi Kristy,
I have been reading your blog as well as that of your FIRE friends (RoG, GoCurryCracker etc). And I have done my calculations and projections for my retirement plan. But I need some advice because I think that we have some unique situations here in Malaysia that is affecting us but not investors based in the America’s or Europe.
Income: Gross: RM 58000 annually, Net: RM 40000 annually (these are considered above average gross and net salary for Malaysia, with average increment of 4-6% annually)
Monthly spending: RM 1900 (exclude loans)
Debts (Outstanding balance): Car loan: Current loan balance to be paid: RM 12300, Student Loan: RM38000
The interest rate: Car loan: 4%, Student Loan: 0%
Your minimum monthly payment: RM 600 per month, Student Loan: 250 per month (plan to increase to RM 500 once car loan is paid up)
Any fixed assets you have (house, car, etc.): Car
And investments or savings you have (cash, bonds, stocks, etc.):
—> Unit Trust fund: RM 150000 (RM 100000 can’t be withdrawn until age 55), we are also free to add in anytime, which where I put all of my monthly savings
—> Employee share program: RM 9000 (company stocks are traded in London Stock Exchange), around RM 400 is deducted from gross salary, this is optional, which I took for now
Special circumstances:
–> Unit trust fund are fixed rate (price of 1 unit won’t change, so no capital appreciation of depreciation), dividend given every year (conservative estimate: 4% and above, so far it’s above 4%)
–> Employee Share program, we get discounted share price, 30% off, current share price is GBP 15 per unit.
–> Our average income doesn’t match our living cost (low buying power, things are expensive for Malaysia who earn Malaysian income), I saw your post on how cost of living in Malaysia barely leave a dent on your budget, unfortunately that’s not the case for us Malaysian 😭
–> We are from South East Asia, so our income is not on the stronger side of world currencies. So I have some doubts on the feasibility of nomadic lifestyle for us.
–> We are subjected to withholding tax for our dividends which we can’t get around from if we wanted to buy ETF from US stock exchange (30%), Canadian stock exchange (25%), Singapore stock exchange (10%)
–> the only country that we are not subjected to dividend stock exchange are the UK, not sure about others
–> ETF in Malaysian Stock Exchange are limited and none really tracks S&P 500 or the US market as a whole, the best we have on this are one that tracks 500 top companies in US that are Shariah/Islamic-compliant (their operations are in line with Islamic business rules)
I would really appreciate it if you could assess my situation here. And here are a couple of particular question that came to me when I was doing my on assessment and projections:
–> If I were to treat my whole investment as one giant account, since we have a unit trust that yield 4% and above and very reliable, and doesn’t have any capital appreciation or depreciation, should I treat this unit trust fund as my fixed income allocation, and thus, for the ETF, go fully on equity?
–> Any advise on the withholding tax? Because the 10% to 30% rate kinda eclipse the MER and management fees factors.
–> Any advise on alternative to nomadic lifestyle since we don’t really have other countries around the world that we can live half of our living expenses due to currency power while have a decent (not luxurious!) standard of living (good healthcare, clean water, decent safety levels, you know those basic things that help you sleep at night)
–> I also look forward on the overall assessment. Hope you find some fun in tackling this scenario. I would love this FIRE movement to apply strongly to everyone, doesn;t matter where they are from. Thank you.
This one jumped out at me for two reasons: One, our reader is from Malaysia, a country I love to visit. Thinking of the street food markets of Penang immediately makes my mouth start to water. And secondly, it deals with an issue that not a lot of people realize: the challenges that people who live in Muslim majority countries face in investing.
Sharia Law and Index Investing
The reason why it’s so much harder to invest in a Malaysia is because of Sharia law. Now, I am by NO means an expert on this, but Sharia law restricts what investments someone can or can’t own. Specifically, they ban the ownership of any businesses that are involved in alcohol sales, pork products, pornography, gambling, and a whole bunch of other areas. This means that index funds like the ones we use in the Investment workshop are not Sharia compliant, and therefore can’t be owned by Muslims.
Another big thing Sharia law bans is the ownership of anything that pays interest. That includes bonds of any kind, preferred shares, and GICs. Even putting money into a checking or savings account is technically forbidden, so the entire Yield Shield strategy I write about is off the table.
Put all that together and it basically means those who follow a strict interpretation of Sharia law can’t invest the way we teach in our Investment Workshop and generate a passive income from their portfolio. Instead, they are limited to using real estate to invest (which as the current pandemic is revealing, is not that stable), or investing in individual companies that are Sharia-compliant (which is simply another from of active investing, again something I don’t recommend).
The Banking System Tends to be Restrictive
Because of these restrictions, the banking system in Muslim-majority countries tend to be really restrictive. They aren’t going to bother to offer access to index funds or bond ETFs if most of their customers aren’t allowed to own it anyway, plus by doing that they risk becoming non-Sharia-compliant themselves, which would cause issues with their governments.
But remember, not everyone in Muslim-majority countries are Muslim. Malaysia is home to a sizeable Chinese and Indian population as well, not to mention expats from Europe or North America. If they can’t walk into a local bank and get access to Vanguard funds, what are they supposed to do?
Time to Offshore
The best thing about doing all these Chautauquas is that you get to meet all sorts of finance nerds from all over the world. One I met a few years ago was Steve Cronin, founder of DeadSimpleSaving.com. Steve is a British expat living and working in Dubai, so he ran into this exact problem on his journey to FIRE. But rather than throw up his hands and give up, Steve managed to figure out a way to build his FIRE portfolio, and the solution was to essentially get his money out of the country first.
I interviewed him on this blog a while ago, but essentially he opened up an investment account with Interactive Brokers, a US-based low-cost brokerage firm that is special in that it allows non-US residents to open up an account. There is a ton of paperwork involved, but Malaysia is on their list of allowed countries.
Second, because Malaysian ringgits (and UAE dirhams for Steve) aren’t supported on the platform, you have to exchange the money into USD. For this, check out Transferwise. I’ve used it for transfers beyond USD/CAD, and it’s way cheaper than doing it at a bank. Here’s a guide on sending ringgits from a Malaysian bank.
And third, to get around taxation issues he recommends investing in a Ireland-domicilied UCITS ETFs that track the indexes. If our reader invests directly in a US-based fund, they are going to get hit with a nasty 30% withholding tax on dividends, and because Malaysia and the US don’t have a tax treaty, our reader won’t be able to recover that amount when they file their taxes. Ireland, on the other hand, has a lower withholding rate (15%) and has a tax treaty with Malaysia, so our reader would be able to claim the withholding taxes as a credit against their other taxes. The ETFs Steve recommends is the Vanguard FTSE All-World UCITS ETF (VWRA) and iShares Global Government Bond UCITS ETF (IGLA).
Check out Steve’s excellent guide to Expat investing on his blog for all the gory details.
Math Shit Up!
So without further ado, let’s Math Shit Up!
| Summary | Amount (in MYR) |
|---|---|
| Income | $58,000 gross, $40,000 net |
| Expenses | $1900 per month, $600 minimum for car loan, $250 minimum for student loan |
| Assets | $150,000 trust + $9,000 shares = $159,000 total |
| Debt | $12,300 car loan (4%), $38,000 student debt (0%) |
First of all, it’s easy to lament the fact that you’re earning in Malaysia rather than the US, but it’s important to remember that there are some advantages to not being American. Right now, the MYR to USD rate is 4.3:1, so your car loan is only $2,844 USD (!), and your student loan is only $8,787 USD (!!). I regularly get emails from Americans that have been saddled with $100k+ USD in student loans with no obvious way out, so count yourself lucky on that one.
So let’s look at the debt. Your debt levels are not too insane given your earnings, and at pretty low interest rates too. I would aggressively pay off the car loan first since it has an interest rate. If you redirect all your excess cash towards that loan, you should be able to get rid of it in a year.
Your student debt, on the other hand, you shouldn’t bother paying more than the minimum. You have a 0% interest rate student loan?!? How did that happen? Do all Malays get interest free student loans?
So that means after the first year, your monthly living expenses drop to $1900 + $250 = $2150, or $25,800 annually. This means that your annual savings rate will rise to $40,000 – $25,800 = $14,200.
And after about 13 years, the student loan will also be paid off, which will have the effect of living expenses dropping to $1900, or $22,800 annually. This will cause your annual savings rate to rise to $17,200.
Once all loans are paid off, your FI target will be $1900 x 12 x 25 = $570,000. How long will it take to get there?
| Year | Trust | Shares | Savings | ROI (4% trust, 7% shares) | Total |
|---|---|---|---|---|---|
| 1 | $150,000.00 | $9,000.00 | $0.00 | $6,630.00 | $165,630.00 |
| 2 | $150,000.00 | $15,630.00 | $14,200.00 | $7,094.10 | $186,924.10 |
| 3 | $150,000.00 | $36,924.10 | $14,200.00 | $8,584.69 | $209,708.79 |
| 4 | $150,000.00 | $59,708.79 | $14,200.00 | $10,179.62 | $234,088.40 |
| 5 | $150,000.00 | $84,088.40 | $14,200.00 | $11,886.19 | $260,174.59 |
| 6 | $150,000.00 | $110,174.59 | $14,200.00 | $13,712.22 | $288,086.81 |
| 7 | $150,000.00 | $138,086.81 | $14,200.00 | $15,666.08 | $317,952.89 |
| 8 | $150,000.00 | $167,952.89 | $14,200.00 | $17,756.70 | $349,909.59 |
| 9 | $150,000.00 | $199,909.59 | $14,200.00 | $19,993.67 | $384,103.26 |
| 10 | $150,000.00 | $234,103.26 | $14,200.00 | $22,387.23 | $420,690.49 |
| 11 | $150,000.00 | $270,690.49 | $14,200.00 | $24,948.33 | $459,838.82 |
| 12 | $150,000.00 | $309,838.82 | $14,200.00 | $27,688.72 | $501,727.54 |
| 13 | $150,000.00 | $351,727.54 | $17,200.00 | $30,620.93 | $549,548.47 |
| 14 | $150,000.00 | $399,548.47 | $17,200.00 | $33,968.39 | $600,716.86 |
14 years. Now, this table looks a little different than usual. Because you have so much of your money in this unit trust that pays 4% dividend, you’re right in that you should treat that as the fixed income part of your portfolio. That means you should begin building up the stock part of your portfolio. Any money you save and any income you get from that trust should be invested into a world stock index fund, like VWRA which Steve uses. To model this, I kept the two balances separate and used a 4% return for the trust and a 7% return for the stocks. If you stop putting money into the trust and start building up your equity position, by the time you retire you’ll be 66% stocks and 33% income, which is just about right.
Does Travel Still Help?
One last thing before we sign off. You’re right that global arbitrage doesn’t help as much when you’re earning in a weaker currency, but there are still places you can travel to where your money will still go far.
While SE Asia was generally cheaper, Malaysia was definitely on the higher end of cost-of-living within that region. That means that there may still be opportunities to lower your cost of living in Thailand, Cambodia, or Vietnam.
And one strange thing I did notice when I was travelling around Europe was that there was a surprising number of Malaysian travellers in Poland. When I asked them why, they told me that the Polish Zloty was about 1:1 parity with the Malaysian Ringgit, so Poland was one of the few European countries that they could travel to without breaking the bank. So definitely check Poland out (when this lockdown is over of course)!
Conclusion
So right now, you’re heading towards a retirement in 14 years. A lot can change in that time, and based on your student debt numbers it seems like you’re just starting out in your career. A promotion or a change in job can have a dramatic effect on your time-to-retirement. But as long as you don’t jump your expenses, and assuming you’re in your mid 20’s, that’s still retirement by 40, which ain’t bad at all.
What do you think? Is there something else our reader can do to dramatically shorten his time to retirement?
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“ Ireland, on the other hand, has a lower withholding rate (15%) and has a tax treaty with Malaysia, so our reader would be able to claim the withholding taxes as a credit against their other taxes”
Not quite. The 15% withholding tax leakage stays with the IRS in the US before it even gets to the fund. There’s then no level 2 tax at the fund level from the Irish tax authorities. The reader would then have to assess level 3 taxes in Malaysia.
Yep, good call Genghis and even worse is the 40% estate tax when you die, on any US-stocks or US-domiciled funds (over $60k total). This can be completely avoided by Irish-domiciled funds like VWRA.
Hi- first time commenting for me. But since I love Malaysia, I just couldn’t resist!
Since you mentioned geographic arbitrage in retirement, I thought why not use that during your earning year. Get a higher paying job in neighbouring Singapore, save as much as you can and retire earlier. If you want to keep costs even lower, consider living in Johor Baru and commuting into SG for work, so you have the low cost of living in Malaysia and the high income from SG.
All the best from another non US/Canadian FI enthusiast!
Commuting is currently not an option due to border lock-down. Even in normal times commuting is a huge nightmare with the jams on the 2 causeways. I do have colleagues who do this though so it’s not impossible, just lots of hassle.
Married to a Malay/sian. Writer should have access to ASB and ASN ASW accounts, which are basically government backed mutual funds that have historically generated 6-10% return every year over their lifetime?
That should take the place of the yield shield.
Also you can lower your expenses by buying local.
Foreign cars in Malaysia are taxed like crazy.. 200%. Drive a locally made car– Proton or Myvi, and buy used if you can.
Also, eating out in Malaysia seems to be cheaper than buying food and cooking, especially if you eat at ‘mamak’ stalls, hawker stalls, and night markets. It’s possible to save lots of money by not spending money on imported items like cheese, or eating at fancy restaurants.
Without commenting on the financial technical details for each country around the world, FIRE can be achieved having a clear financial target with 1 of the 2 following mindsets –
1. You want to have an average life in comparison to the citizens of your country – you take the average standard of living of the citizens within a country and time it by 25 and that is your FIRE target.
2. You want to have a FI life without the need to have the similar style as other people in your country – you take your average annual expenses for the last 5 years and time it by 25 and that is your FIRE target.
If FIRE is achieved with the target established in strategy #1, you can are freely live and travel anywhere in your country and any COUNTRIES with lower or compatible GDP/Capita.
If FIRE is achieved with the target established in strategy #2, you can are LIMITED to live and travel to places if you are willing to manage with less financial resource.
Note – eventually most of you (95%) will not be happy live and travel anywhere if you are financially incapable of at minimal affording an average life of the locals.
Without a clear financial target established at the start of any FIRE journey – failure is inevitable!
Seems it may be cutting some people short by setting a goal to simply make enough to just survive somewhere.. anywhere (like a move to Poland comes across as quite random, personally). If that were so, many people can already FIRE now without saving more and just move to some poorer country where their $ goes further and call it a day. But I think many people are going to want more than that just having enough to pay off the bills
@TheEngineer: I love your simple and concrete way in setting the financial goal and presenting the inevitable consequences for each choice.
Totally agree with Anna: Get a higher paying job in neighbouring Singapore, save as much as you can and retire earlier. The problem with earning MYR is not the currency, but the INFLATION, remember how SGD used to be 1:1 with MYR, but look at it now. Essentially with the current inflation rate of 3-4% your interest or dividend is nothing! The 3RM nasi lemak now is 10RM once you retired. That is scary. Real estate, on the other hand, is possibly a better solution in some Asian countries; the demand is always there; as a hedge against inflation; the running cost is low (water, electricity, sewage, insurance in Malaysia is cheap).
Also with other type of investment (unit trust, ETF) you can look at Fundsupermart for both Malaysia and Singapore, they offer a great choice esp the Singapore one. As to where to live when you retire you can always live in a smaller town with less temptation to spend, or go to Thailand.
FIRE comes in many forms, the nomadic lifestyle is not for everyone, some people FIRE without the need of being nomadic, some FIREes still own a house; as you get older you may one to settle somewhere. Another tip, pay off your student loan as slow as possible as it is 0% interest; instead of paying it off, just invest it wisely somewhere else.
The bottom line is try to save as much as possible, stay mentally and physically healthy (eating 2 mins noodle every day is not an option), beat the inflation, invest wisely, don’t fall into get-rich-quick scheme (they are everywhere in Malaysia sadly) and find your own FIRE vision.
Thanks for the shout-out Wanderer! Glad my info is still useful. I’m so passionate about helping other expats because it is SO hard to find useful guidance for expat investing. Even worse, there are lots of people trying to screw you over.
Expats unite! Come and say hi here or on my site.
The xFI Expat Financial Independence podcast is coming soon, I promise!
Kristy and Wanderer, shout out – I love your work!
First time commenting, I am ex-Malaysian and naturalized American. Thus, I have love and hate feeling on Malaysia. I will try to keep my ranting to the minimum on Malaysian’s politic.
FIRE goal on Malaysia Standard – What you “unconsciously” have vs chasing luxury?
It is easy for American/Canadian/European to set FIRE number, because their safety net is “unconsciously” far greater. For example, Canadian have world-class healthcare. Another example, if an American kids need to go college, the college options are usually American college (leave the student loan in separate discussion). Well, I am not saying Malaysia do not have sufficient healthcare or college, but you must do an evaluation that the standard you want. I put up healthcare and children education because that usually you want the best. For American/Canadian/European is unknowingly safety net, but for you, you are chasing luxury on their basic.
Again, American/Canadian/European is unconsciously looking from top-down in term of options, Malaysian is looking from lower-middle and down. I know this can be controversial, because it looks like I am questioning your enough. I suggest you look deep in your evaluation on FI number before you quit.
Malaysia will continue to flourish or maybe not?
Singapore, South Korea, and China used to be more like Malaysia in economic growth. Remember, Singapore was part of Malaysia? Singapore with no natural resources humiliates Malaysia in growth. My dad used to tell me South Korea and China in the good old days, my father stretched his Riggit muscle, purchasing power was very high. I even think Vietnam’s growth will be threatening Malaysia in less than 15 years. Is the Malaysia government moving the country forward or behind? 1MDB, Backdoor Government, further racial issues or really for the Malaysian people?
MYR to USD used to be RM2.5 to USD1 in 1998 (year 2020: RM4.35 to USD 1, and SGD1.43 to USD1). Imagine you retire in 1998, and you want to travel (or kids to college) to US in 2020. You need to account losing currency value and US standard inflation. The solution might be having foreign currency to hedge this risk.
Business Mind Set, Holiday Working Visa, and Foreign Education/Job.
Starting a business is easier in Malaysia compared to west. Malaysia have less regulation. Sadly, corruption and tax evasion (cash business) is prevalent as well. (I am NOT suggesting you break the laws, and certainly these are facts that I hate the most)
Consider using holiday working visa, if your age is allowed. That way you get to see Australia and earn AUD. That might help to pay off student loan faster.
Studying in the west and immigrate, open door for you and your next generation. Kristy’s dad is a good example. You can strive for job relocation to the west within your company. Once earn Dollar/Euro/Sterling, that might accelerate your plan.
Thanks for posting such good content!
Dear All,
Hi, I am Dr. HK Goh. I certainly agree that retiring in Malaysia is pretty difficult due to our weak currency and various commitments faced by Malaysian parents- one of them is certainly kids’ education fund.
However, it is not impossible because I myself have started the journey of FI by investing in various assets in Malaysia and I think it is doable provided we have the will power and perseverance.
I started to learn how to earn currencies other than MYR by side hustling during my internship and residency.
I believe every Malaysian can do it if we have a proper plan in place and stick to the plan.
And Kristy, I really love your book and I live in George Town, Malaysia. I and my wife would be happy to host you when you come to Penang again next time!!