152) Can You Retire with 1 Million Units?

152) Can You Retire with 1 Million Units of Unit Trust Funds?

I was asked by a Unit Trust Consultant to comment on this question.

He further explained on this concept:
1) You have 1 million units of a Unit Trust fund.
2) Each unit declares a distribution of 6 sen per unit per year.
3) 6 sen x 1,000,000 = RM60,000 per year.
4) RM60,000/12 = RM5,000 per month.

You get a passive income of RM5,000 per month. You are not allowed to withdraw the investment money. Only use the distribution payout. This way, you can have money every month forever.

Note:
a) The fund declares distribution consistently every year.
b) The distribution amount is at least 6 sen per year. More is better.
This is a great idea. 

However, there are few things that you need to consider.

Which fund can give you 6 sen distribution every year?

If you only look at distribution, there are many funds that declares distribution on annual basis.
Upon further checking, not many can give you 6 sen per year.

A distribution is actually returning you part of your Net Asset Value of the fund.
Let's look at the numbers in detail.

Can a 80 sen per unit fund gives you 6 sen distribution?
Scenario A: 80 sen per unit fund that declares 6 sen distribution, will be valued at 74 sen after distribution.
80 sen - 6 sen = 74 sen.

Distribution yield = Distribution amount / unit price after distribution
Distribution yield = 6/74 = 8.1%

Can a 25 sen per unit fund gives you 6 sen distribution?
Scenario B: 25 sen per unit fund that declares 6 sen distribution, will be valued at 19 sen after distribution.
25 sen - 6 sen = 19 sen

Distribution yield = 6/19 = 31.5% 

Which is more possible? Scenario A or B? 
Answer: Scenario A with a lower Distribution Yield.

Please also note that Distribution yield is NOT the same as annual returns. 
A fund that declares distribution may even have a negative annual return.


Let us look from the Ringgit & Sen perspectives.

Distribution payout: RM60,000.
The fund increased back to the initial fund price after 1 year.
Eg. 80 sen became 74 sen after distribution. Then increased back to 80 sen after 1 year.

Scenario A: 1,000,000 x RM0.80 = RM800,000
RM60,000/RM800,000 = 7.5% withdrawal per year.

Scenario B: 1,000,000 x RM0.25 = RM250,000
RM60,000/RM250,000 = 24% withdrawal per year.

From the 2 scenarios, it is also important for you to know the fund prices.

Number of units is only half of the equation for total value.

Total Value = Number of Units x Unit Price

QUIZ: Can I retire with only 100,000 units?

ANSWER: NOT SURE. It Depends on the price of each unit.

Yes, if each unit is RM20 each.

No, if each unit is RM0.20 each.

The more Correct Question should be:

"Can You Retire With 1,000,000 Ringgit?" 

When you retire, you need to pay for the things you buy with Ringgit or Dollars. 

Not with the units. 

Only the Unit Trust Management Company will accept the Unit Trust units and convert the units to Ringgit.

Please consult your Unit Trust Consultant for further information and proper planning. 

More related articles:

Benefits of Distribution in Unit Trust:

https://highlevelrules.blogspot.my/2017/11/benefits-of-distribution-in-unit-trusts.html

Difference between Dividend vs Distribution

https://highlevelrules.blogspot.my/2017/11/dividend-vs-distribution.html