Con­tin­u­ing your re­tire­ment fund­ing dry run

New Straits Times - - SUNDAY VIBES - RAJEN DEVADASON, CFP, IS A LI­CENSED FI­NAN­CIAL PLAN­NER, PRO­FES­SIONAL SPEAKER AND AU­THOR. world, in­ter­spersed with brief fi­nan­cial plan­ning lessons.)

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.

SUS­TAIN­ABLE OP­TIONS

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

RE­TIRE­MENT FUND­ING

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.

Happy plan­ning!

© 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

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