Im­por­tance of Re­tire­ment Plan­ning: Fi­nan­cial Ed­u­ca­tion for Re­tirees


Insurance - - CONTENTS - Text Dato’ Steve Ong | CEO of Pri­vate Pen­sion Ad­min­is­tra­tor | The Cen­tral Ad­min­is­tra­tor for Pri­vate Re­tire­ment Scheme (PRS)

TFi­nan­cial il­lit­er­acy may stunt people’s abil­ity to save and in­vest for re­tire­ment, un­der­min­ing their well be­ing in old age.

he adage that “people don’t plan to fail but fail to plan” is a good re­minder that our re­tire­ment fu­ture needs to be ad­dressed now with a proper re­tire­ment plan and ac­tion in or­der to en­sure that the fu­ture does not come as a “sur­prise,” and that we have the abil­ity to in­flu­ence it now. In try­ing to un­der­stand the mind­set of Malaysians on the sub­ject of re­tire­ment and why they lack in­ter­est in tak­ing con­trol of their fi­nan­cial fu­ture, the Pri­vate Pen­sion Ad­min­is­tra­tor Malaysia (PPA) has found five com­mon ex­cuses, which are based on un­founded as­sump­tions or myths on how people plan for their re­tire­ment. This, to­gether with a lack of ur­gency, of­ten leads them to pro­cras­ti­nate in tak­ing ac­tion now to se­cure their re­tire­ment plans.


Myth#1 – Malaysians have the mind­set that their EPF sav­ings will be enough to take care of them through their re­tire­ment years. The com­mon as­sump­tion made is that their EPF con­tri­bu­tions will be ad­e­quate for them to re­place their earned in­come when they re­tire. How­ever, people should take note that their EPF con­tri­bu­tions may or may not be suf­fi­cient to re­place earned in­come. EPF 2011 sta­tis­tics showed that a whop­ping 72 per cent of EPF mem­bers who are at the pre-re­tire­ment age of 54 have sav­ings of just RM50,000 and less. Cou­pled with that, 50 per cent of re­tirees spend their en­tire EPF sav­ings within five years.

Myth #2 – Many people make the as­sump­tion that their chil­dren can take care of them dur­ing their old age; how­ever, due to the es­ca­lat­ing cost of liv­ing, some chil­dren find it dif­fi­cult to even pro­vide for their own fam­i­lies, much less than for their own old folks.

Myth #3 – There’s plenty of time. It all has to do with tim­ing. Some people reckon it is too early for them to start sav­ing for re­tire­ment, while oth­ers think they can’t do much be­cause it is al­ready too late for them to start. No mat­ter when you start sav­ing, time and the won­der of com­pound­ing are your best friends when it comes to re­tire­ment sav­ing.

Myth #4 – I can still work. This deals with work­ing af­ter re­tire­ment. Choos­ing to work af­ter re­tire­ment is one thing, but be­ing com­pelled to work just to sur­vive is an­other.

Fi­nally, Myth #5 – People have the im­pres­sion that they can cut back on their ex­penses when they re­tire. But in re­al­ity, if some­one is al­ready used to a cer­tain life­style, it is not easy to ad­just. In ad­di­tion, we live in an en­vi­ron­ment with ris­ing in­fla­tion and in­creas­ing med­i­cal cost. It is im­per­a­tive to plan your fi­nances ad­e­quately for your re­tire­ment.

THE BIG RE­TIRE­MENT PROB­LEM Re­search has shown that the rea­son people around the world do not plan ad­e­quately for their re­tire­ment and ar­rive at their re­tire­ment with lit­tle or no wealth is mainly due to the lack of fi­nan­cial lit­er­acy and be­ing woe­fully un­der­in­formed about ba­sic fi­nan­cial con­cepts. Fi­nan­cial il­lit­er­acy may stunt people’s abil­ity to save and in­vest for re­tire­ment, un­der­min­ing their well be­ing in old age. Ex­perts of­ten point to poor fi­nan­cial de­ci­sion-mak­ing as a cause of the re­tire­ment se­cu­rity cri­sis and ren­der re­tirees the most vul­ner­a­ble to eco­nomic hard­ship in re­tire­ment. The prob­lem be­comes more crit­i­cal as re­tirees move away from pro­fes­sion­ally man­aged pen­sion to­ward do-it-yourself fi­nan­cial plan­ning. This is telling, as sta­tis­tics show that more than half of re­tirees in Malaysia spend their en­tire EPF sav­ings within five years. It is easy to fall into the trap of de­plet­ing your re­tire­ment sav­ings if one treats the sav­ings as a wind­fall and not keep­ing it in­vested to garner pas­sive in­come. Whilst the above re­tire­ment is­sues have been com­monly raised, the lack of in­ter­est and ur­gency for people to take plan­ning for their re­tire­ment se­ri­ously sug­gests that there is a need to bring re­tire­ment is­sues to a per­sonal level, whereby in­di­vid­u­als can find out for

Leav­ing one’s re­tire­ment to chance may put you in fi­nan­cial jeop­ardy, re­sult­ing in old age de­pen­dency and poverty.

them­selves what they need to fo­cus on to prop­erly plan for their re­tire­ment. PPA has come out to help in­di­vid­u­als plan for their re­tire­ment by fo­cus­ing their at­ten­tion on three main is­sues that must be ad­dressed now; other­wise they may con­trib­ute to­wards mak­ing re­tire­ment a big prob­lem later. First, people need to ask whether they have ad­e­quately planned for their re­tire­ment in­come to re­place their earned in­come, so as to con­tinue to en­joy their cur­rent stan­dards of liv­ing. The rule of thumb is 2/3 re­place­ment in­come ra­tio of the last drawn salary, i.e. if a per­son earns RM6,000 be­fore he re­tires, he will need RM4,000 as his monthly re­tire­ment in­come to con­tinue to en­joy rel­a­tively the same stan­dard of liv­ing he has be­come ac­cus­tomed to. How much a per­son needs for their re­tire­ment – whether it is RM800 or RM8,000 – re­ally de­pends on their pre-re­tire­ment life­style, health sit­u­a­tion and fam­ily de­pen­dents. With­out suf­fi­ciently re­plac­ing their earned in­come when they re­tired, re­tirees will have to cut back on their liv­ing stan­dards or fall into the de­pen­dency of oth­ers to take care of them, es­pe­cially if they are no longer fit to work to earn their own in­come. Sec­ond, people need to en­sure that their in­come can sus­tain them for the whole du­ra­tion of their re­tire­ment years. The key is­sue here is out­liv­ing your re­tire­ment funds, which would other­wise leave people very vul­ner­a­ble and out of in­come to sup­port when they are older. Malaysians are liv­ing longer and longer. The cur­rent aver­age life ex­pectancy of a Malaysian is about 75 years, and this num­ber is ex­pected to in­crease to be­yond 80 in a few years to come if med­i­cal marvels con­tinue to keep us healthy. This means, Malaysians on aver­age would have to al­lo­cate enough sav­ings to sus­tain 20 to 30 years of their re­tire­ment life so they do not have to out­live their sav­ings, with the cur­rent re­tire­ment age at 60. Fi­nally, there is a need to have re­tire­ment in­come in­fla­tion ad­justed. In­fla­tion has a sub­tle and quiet way of in­creas­ing the cost of liv­ing and erod­ing pur­chas­ing power. While RM1 mil­lion seems a lot to­day, it may not buy a lot 10 years down the road. As such, we need to make sure our money works hard for us by en­sur­ing the growth rate of our re­tire­ment sav­ings and in­vest­ments is higher than that of in­fla­tion; other­wise in­fla­tion will erode the stan­dard and qual­ity of our re­tire­ment life over time. If the con­cerns of ad­e­quacy, sus­tain­abil­ity and in­fla­tion­ary are not ad­dressed now with proper plan­ning for re­tire­ment, people will be leav­ing it to “chance that things will turn out al­right” for them when they re­tire. Leav­ing one’s re­tire­ment to chance may put you in fi­nan­cial jeop­ardy, re­sult­ing in old age de­pen­dency and poverty. It is with this in mind, that the PPA is ad­dress­ing the is­sues of in­ad­e­quacy of sav­ings among the el­derly, longer life ex­pectancy, in­ad­e­quate sav­ings due to shorter pe­ri­ods of sav­ings and longer pe­ri­ods of spend­ing by pro­mot­ing aware­ness and ed­u­ca­tion to em­power the pub­lic to take con­trol of their re­tire­ment lives. For these rea­sons, the Pri­vate Re­tire­ment Scheme (PRS) was launched to pro­mote sav­ing and in­vest­ing ad­e­quately to the pub­lic. Malaysians now have two pil­lars for their re­tire­ment, namely the manda­tory EPF scheme and the vol­un­tary PRS scheme. In the fu­ture, ev­ery work­ing Malaysian ought to have two re­tire­ment schemes that will pro­vide fi­nan­cial se­cu­rity for their re­tire­ment.


Save – Ac­cu­mu­lat­ing funds for re­tire­ment needs to be a dis­ci­plined and reg­u­lar ac­tiv­ity to achieve the de­sired re­tire­ment nest egg. Smart re­tire­ment plan­ning sug­gests that we set aside an additional 10 per cent of our take-home pay for re­tire­ment. We

also need to be very clear on the pur­pose, that it is for re­tire­ment only and not for other pur­poses. At PPA, we strongly en­cour­age mem­bers to do reg­u­lar monthly con­tri­bu­tions for PRS to in­cul­cate the habit of sav­ing for re­tire­ment, whether you are start­ing young in your 20s or later in your 50s. The longer the time hori­zon one saves for your re­tire­ment, the more sav­ings one will at­tain to re­place your in­come at re­tire­ment. Reg­u­lar con­tri­bu­tions will help to “dol­lar cost aver­age” your sav­ings, a tech­nique de­signed to re­duce mar­ket risk through the sys­tem­atic reg­u­lar con­tri­bu­tions at pre-de­ter­mined in­ter­vals and set amounts.

In­vest – While sav­ing is set­ting aside money, in­vest­ing it pro­vides com­pound­ing growth. Money that is saved and in­vested has a po­ten­tial to en­joy com­pound growth and po­ten­tially higher re­turn than money parked in bank de­posits to at least beat in­fla­tion. When in­vest­ing, people need to ask what their re­tire­ment ob­jec­tive is – for pre-

...there is a need to have re­tire­ment in­come in­fla­tion ad­justed. In­fla­tion has a sub­tle and quiet way of in­creas­ing the cost of liv­ing and erod­ing pur­chas­ing power

re­tire­ment ac­cu­mu­la­tion, cap­i­tal growth or re­tire­ment in­come gen­er­a­tion. In ad­di­tion, people will need to cus­tom­ize their re­tire­ment in­vest­ment plan ac­cord­ing to their age, life­style and fi­nan­cial cir­cum­stances. Be­fore mak­ing an in­vest­ment de­ci­sion, people should con­sider the dif­fer­ent type of risks that may af­fect them and learn to man­age risks by way of di­ver­si­fi­ca­tion, man­ag­ing the per­for­mance of in­vest­ments and know­ing the choices that are avail­able.

Re­tire – Re­tire­ment is not a des­ti­na­tion but a long jour­ney. Dur­ing the 30 to 35 years pre-re­tire­ment phase, it is a cru­cial time for a per­son to ac­cu­mu­late ad­e­quate funds for re­tire­ment. But it does not stop there. Re­tire­ment also means, dur­ing the golden years (also known as de­cu­mu­la­tion phase), one is able to man­age his or her re­tire­ment sav­ings in or­der to stretch a good 20 years. The best way to do so is to keep your sav­ings in­vested and make a monthly with­drawal of a set amount, enough to use as ex­pen­di­tures, as pas­sive in­come. This is to en­sure that your money continues to work hard for you and for you to spend it on only nec­es­sary things post-re­tire­ment.

En­joy – Re­tire­ment should be the most ex­cit­ing phase in our lives, but it re­quires us to have the in­come and fi­nan­cial se­cu­rity to make our re­tire­ment years golden ones. The end ob­jec­tive of re­tire­ment plan­ning is to en­sure that we en­joy the golden years with ad­e­quate, sus­tain­able and in­fla­tion ad­justed in­come. For all the ac­cu­mu­lat­ing years, which seem to mean sac­ri­fic­ing our im­me­di­ate for our fu­ture con­sump­tion, it is the only sure way to pro­vide en­joy­ment for our re­tire­ment years. Malaysians can now take con­trol of their re­tire­ment by fol­low­ing PPA’s sim­ple for­mula for suc­cess­ful re­tire­ment – S.I.R.E (Save. In­vest. Re­tire. En­joy).

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