Continuing your retirement funding dry run
OUR superannuation phase might stretch 20, 30 or more years. Given stark future public finances, how should we take personal responsibility for a great retirement? All intelligent adults over the age of 30 should spend some time each year mulling over our eventual retirement and how to pay for it. This level of annual contemplation is justified. Furthermore, as we mature it would make sense for us to spend more time each decade on this knotty issue because the biggest funding risk in retirement is longevity risk.
This problem is compounded by recent megatrends. Less than two decades ago — when the 20th century bowed out to usher in our 21st century — old-style pensions were already in steep decline.
Among financial planners like me who specialise in crafting and managing retirement funding solutions for their clients, a conventional lifetime pension of the type most Malaysian civil servants — but hardly any other groups of Malaysian workers — still enjoy as the top perk for serving our government of the day and (hopefully) the rakyat, is a Defined Benefit or DB plan.
Worldwide, because of worsening public finances and greying demographics, DB plans are increasingly unsustainable. The reason is clear — from a fiscal perspective, DB plans require intergenerational cross subsidies: Taxing a shrinking group of younger workers to fund the pensions of a growing population of retirees.
So, to replace unsustainable DB plans, we’ve seen the rise of much more sustainable Defined Contribution or DC plans. All of us in the Malaysian private sector with EPF and perhaps even PRS (Private Retirement Scheme) accounts and who further sacrifice to build up our own self-funded Wealth Accumulation Portfolios (WAPs) possess DC plans.
A DC plan requires a lot more from its owner in terms of smarts, sacrifice and self-learning. So I’m not being selfserving when I tell you, for most people who lack those vital traits, working alongside a trusted licensed financial planner, unit trust advisor or private banker can spell the difference between a golden retirement and a shabby, sad one.
For those interested in such matters, please note that in my column last week (which you may access here, www.nst. com.my/authors/rajen-devadason) I taught readers how to initiate a series of retirement funding dry runs, beginning 10 years before their target retirement age. You might want to read (or reread) last week’s column before continuing with this one.
Also, as mentioned last week, I plan to cover the more technical aspects of creating passive retirement income within a DC plan in future columns here. (You might also wish to read related lessons from me even sooner on Twitter. If so, follow me there @rajendevadason for a steady diet of my grumbles and observations about our
Now, assuming you run your first retirement funding dry run at age 50 because you hope to retire at 60, and have proactively familiarised yourself with the steps found in last week’s column, here’s how you may continue subsequent retirement funding dry runs.
Five years later, at age 55, if your WAP’s annual yield is 5 per cent, then your monthly yield will average about 0.41 per cent, which is 5 per cent / 12.
If your WAP valuation at this point is RM1 million, funded through organic reinvestment boosting compound growth plus fresh inflows through your sacrificial saving and investing, then your passive monthly income inflow would be about RM4,100.
If your normal monthly expenses then come to RM7,800, at this point your Retirement Funding Cover or RFC would be about 52 per cent. With only five years to go before full retirement, when you would want your RFC to be equal to or more than 100 per cent, this analysis should act as a wakeup call for you to get super-serious about retirement funding!
LONG RANGE PLANNING
You might then decide to:
1. Set aside more money each month into your WAP;
2. Invest more selectively as your retirement looms ever larger on the horizon; and
3. Curb your personal inflation rate through restrained spending choices.
Succeeding in all three major steps could mean that two years later, at age 57, you discover your WAP annual yield rises to 6.4 per cent. Also, if in that time your WAP’s value rises to RM1.2 million, then your passive annual income flow would be RM76,800 or RM6,400 per month.
Furthermore, if you hypothetically slash your regular cost of living by perhaps wisely utilising your EPF Account 2 funds to pay off your home mortgage in full, thus causing those regular long-term monthly payments to end, then your new living expenses might fall to RM7,000 a month. Those developments taken together would bump up your RFC to an impressive 91 per cent.
By now you should understand all the logical steps in this series of analyses. So I’ll leave you to crunch additional numbers you think will fit your circumstances one year from retirement. Your main takeaway from this column (along with last week’s) should be an enhanced realisation that long range planning for retirement makes much wiser, better sense than winging it while hoping — irrationally — for everything to somehow work itself out.
It may be cliched but the adage ‘failing to plan is planning to fail’ is relevant when it comes to mulling over just what our golden years can and might look like.
© 2018 Rajen Devadason
Read his free articles at www. FreeCoolArticles.com; he may be connected with on LinkedIn at https://www.linkedin. com/in/rajendevadason, or via rajen@ RajenDevadason.com You may follow him on Twitter @RajenDevadason