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Good Luck!
the Star Sunday June 3, 2007
READERS responded positively to Sunday Star’s front page story “Can you retire?” last week. Many sent in their feedback and described the “wake up” call for early planning for one’s retirement as a “community service”.
Many also felt more should be done by various parties, including the Government, to ensure that retirement does not become a burden on retirees. See readers’ views in accompanying story.
There were also queries on how one can effectively plan for one’s retirement. In response to such queries and for a more in-depth look at how people can invest their money at different stages of their lives, Sunday Star will feature a six-part series on financial management with retirement in mind.
The series, which begins next Sunday, will be written by the Financial Planning Association of Malaysia and seeks to cover the following areas:
How much money do I need when I retire?: The most frequently asked question and the most difficult to answer as it involves many factors and differs from individuals to individuals. We will look at some of the main considerations one needs to take into account.
When should I start my retirement planning: It is never too early to do so. We will introduce the magic of compounding, the capacity to take on more risk when one is younger and therefore avail oneself of opportunities with higher rewards.
Retirement planning is not for those about to retire.
Different folks, different plans: We will provide generic solutions to a few cases based on where people are in the life cycle eg. Young, single, working adults, married adults with young families, middle aged adults with college-going or working children.
DIY or work with Investment Advisers: We will examine the pros and cons of working out a retirement plan yourself or engaging a professional adviser, and in the case of the latter what are the questions to ask.
So are you ready for retirement: Besides the key issue of adequate financial resources, we will also look at other significant issues that impact a retiree’s well being, including health, social support, and continuing interest in the world around them.
Don’t forget estate planning: Retirees need to be reminded of the need and importance for proper estate planning so that their hard earned, accumulated wealth can be utilised optimally in the best possible manner to benefit their loved ones or causes.
About the Financial Planning Association of Malaysia (FPAM)
FPAM was established in 1999 with the purpose of seeing to the proper development of the financial planning profession and industry. It introduced and administers the CFP (Certified Financial Planner) certification programme with the aim of ensuring that the industry is served by professional, properly certified and ethical financial advisers.
The CFP qualification is recognised by both the Securities Commission and Bank Negara for licensing purpose.
FPAM currently has 42 Charter and Corporate members and about 10,000 individual members, of which about 3,800 are fully Certified members.
Its Charter and Corporate members are drawn from a wide cross section of the financial sector. They include many of the major foreign and local banks, unit trust companies, life insurance companies, trustee firms, security houses and financial planning firms.
Its individual members are drawn from the ranks of these firms and also include those who are accountants, lawyers, members of the academia and the commercial sector.
FPAM is an affiliate of the Financial Planning Standards Board (www.fpsb.org), an international body that owns and oversees the development of the Certified Financial Planner mark and certification programme worldwide.
The Securities Industry Act 1983 requires any person who acts or represents himself as a financial planner to be licensed by the Securities Commission.
Filed in: Malaysia Unit Trust in Media
the Star Sunday May 27, 2007
“IF WE were to start EPF all over again, I think we should go for regular monthly payments like the pension scheme or phased withdrawals rather than having retirees take out their money in one lump sum,” says Rusma Ibrahim, the EPF deputy chief executive officer (organisational development and strategic planning).
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Rusma: ‘The retirement age should be around 58 or 60’ |
Right now, 99.9% of the contributors withdraw their EPF savings in a lump sum once they reach 55.
And it is up to the contributors to manage that money. But sadly, EPF has found that contributors tend to go through that money rather quickly.
Their first survey shows that 70% of retirees use up all their EPF money within three years after retiring. A second survey done in 2004 shows them doing better – they managed to stretch their money up to 10 years.
But that might not be good enough given the fact that people tend to live a lot longer these days. In Malaysia, life expectancy for women is 76 years and for men 72 years, which means that after retirement they have to support another 20 years of living.
And on average, contributors have RM106,000 in their EPF account when they retire; and for a number of people the EPF is their only form of savings.
“If one reaches 55, the probability is he could live until 80 even up to 83. But you can’t stretch that RM100,000 for 30 years. It’s not possible,” says Rusma.
While the private sector is deemed to offer better salaries and perks and a lump sum in the EPF, ironically it is the civil servants who tend to have it better after retirement.
Their monthly pension, which is half their last drawn pay, assures them at least of a continuous source of income regardless of how long they live.
“A good pension scheme is one where there must be regular payment. The quantum will differ but at least you are guaranteed of something,” says Rusma.
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An annuity-like scheme for EPF where retirees get monthly payments, she adds, would have “insured” people against the longevity risk “but we didn’t start off that way.”
But the EPF, she points out, is only one source of savings. Ideally, there should be a multi-pillar system where one can rely on other sources for retirement income.
“This is something there has been discussions on. The Government can provide the policy but the market has to respond by coming up with private pension or annuity schemes for those who can afford it,” she adds.
Another way is to continue working for as long as possible. Rusma believes 55 is much too early to retire given the fact that people are still active and productive at that age.
“Going by the life expectancy, the retirement age should be around 58 or 60. It would make a lot of difference accumulating savings for another five years.
“Even in developed countries, people are talking about how to make people remain in employment for as long as possible,” she adds.
In Malaysia, because of the extended family support system, parents tend to think that “worse comes to worse” their children will take care of them and tend not to look at retirement as a problem.
“But like it or not, this support system is breaking down because of lifestyle changes. People are getting married later and having fewer kids. The children may be working in the city and parents are back in kampung and this physical distance contributes to the problem,” she says.
Rusma points out that planning when to get married and when to have children too are part and parcel of financial planning as these impact on one’s retirement.
“Ideally, when you retire, you should have settled your liabilities. If you had planned properly, your house and car should have been paid up and your children should have finished their education and should have started working, otherwise they would be a burden on you.”
And with inflation and medical costs going up, Rusma cautions, holidays after retirement have to be sacrificed.
“That’s only for the well to do. That’s the reality. Of course all of us have dreams. I have that dream too to go off to South Africa after retirement. But can I afford it? That’s the reality.”
So her advice is for people to continue working as long as they can be productive, to stay healthy and to start saving from young to take care of the future.
Filed in: Malaysia Unit Trust in Media
the Star Sunday May 27, 2007
With people living longer, marrying and having children later and not saving enough, facing retirement is a challenge. While there is growing awareness about the need to plan, less than 5% are prepared for retirement and fail to take into consideration inflation rates and rising medical costs.
IN 1981, when Azman graduated, he got a job in KL which paid him RM1,800 a month. He bought an imported Mazda at RM17,000 and months later he put down money on a RM78,000 single-storey terrace house.
Today, 25 years later, Azman’s daughter has just finished university. Her starting pay is RM1,800, just like her father’s two and a half decades ago.
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Long road ahead: With the life expectancy of men at 72 and women at 76, most people have a good 20 years to live after retirement. |
But unlike her father’s time, imported cars cost over RM100,000 today. So Latifah has opted to buy a Proton for RM45,000 (more than double what her dad paid for his first car).
While her father could afford to buy a house early in his career, Latifah can’t. Houses in KL these days cost at least RM200,000, so she has to work for a few years first before she can own one.
Compared to 25 years ago, the prices of goods, food, petrol and electricity have all gone up. Understandably, it’s an uphill task for Latifah to save on her RM1,800 salary, since the purchasing power of her salary is much lower than her father’s back in the 1980s.
It is a fact that wages have not moved in tandem with the rise of the cost of living and inflation. That trend is expected to continue.
And if people do not start planning early for their retirement, they are going to find themselves in a spot after they turn 55.
Today, three meals cost you RM20 but in 20 years time – with an inflation rate of 6% a year – you will need RM64 per day for the three meals, estimates financial consultant Hazel Ong Archibald of CIMB Wealth Advisors (see Chart 1). The government puts inflation rate at 3.2% to 4.8% but Ong says in urban areas, that figure is about 6%.
So while the RM500,000 in your EPF or bank account at retirement might look good on paper, she says, if you do not invest that money to make it grow at a rate higher than the inflation rate, 20 years later, it would be worth only RM145,053 in purchasing power!
While there is more awareness about retirement planning these days, particularly in the urban areas, in reality this does not often translate into preparedness.
Why?
“Because it is more pleasurable to spend than to save,” opines Ong.
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People understand – at head level – the need to plan and save, she says, but at heart level, emotions rule and instant gratification wins the battle.
“I wanted to persuade a friend to save for the future but she kept saying she had no money but then later I saw she could sign up RM3,000 and RM5,000 for some slimming packages!”
Reality hits when people find that they cannot afford to retire because they had not seriously put aside the money early on in life.
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Ng: ‘Less than 5% are prepared for retirement’ |
“Less than 5% are prepared for retirement,” estimates Life Insurance Association of Malaysia (LIAM) president Ng Lian Lau.
He says those in their 20s think they are too young to think about retirement, while those in their 30s and 40s tend to believe they are doing enough because they have their EPF savings, and those who are 55 feel it is just too late for them.
And the truth is at 55, most people cannot afford to retire.
“People are living longer, life expectancy for women is 76 years. For men it’s 72. With this kind of longevity, people have got more than 20 years after retirement. 60 would be a more ideal retirement age,” he says.
People are marrying later too, points out Ong.
Which means they are having children later in life. If a person has a kid at the age of 35 and retires at 55, the odds are that his child at 20 would probably still be at university or college and his education require financing.
On average, the Malaysian household spent 5.7% on education last year. With the cost of education rising by 6% each year, this is expected to climb steadily.
While parents might buy an education insurance plan for their children, Ong has found that 90% of the time the amount is insufficient. More often than not, parents are willing to give up “everything”, including their own retirement fund for the kids. Which leaves them in a vulnerable position in their old age, unless of course their children provide for them.
As for life insurance, only 40% of Malaysians are covered. Ng says this is a small number compared to 100% in Singapore, 80% in the United States and 400% in Japan (where one person has four policies on average).
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Ong: ‘Inflation rate in urban areas is 6%’ |
And even if one has a life policy as well as savings from the EPF, people should still worry about retirement. This is because without a new source of income, that money would run out. This is especially so if one runs into health problems which is common when people grow older.
“Medical inflation is easily 15% each year. And this could really eat into the savings,” warns Prudential Assurance Malaysia Bhd CEO Tan Kar Hor.
Tan likens the medical bill as a “hole” which if not plugged would leak away one’s entire retirement and savings.
“It’s only a question of how the big the hole is,” he says.
So parliamentary secretary to the Finance Ministry Datuk Seri Dr Hilmi Yahaya’s announcement on Thursday that amendments to the Employees Provident Fund Act would allow contributors to withdraw money to buy insurance for critical illness for themselves and their family is welcome news. The amendment Bill was passed in Dewan Negara that same day.
So how much would one need for retirement?
Experts say this depends on the individual and his lifestyle. And how much he is willing to reduce consumption – to eat out less often, buy fewer things, live in a smaller house, drive less, drive a smaller car and travel less.
The rule of the thumb, says Ng, is managing on 60% of your last drawn pay.
For Ong, it’s 70% of one’s current lifestyle. If a family in Kuala Lumpur with two kids and two cars needs RM5,000 today, at retirement, expenses should go down to RM3,500.
Even based on this calculation, one would need RM747,000 if one were to live for 25 years after retirement, and RM806,200 for the next 30 years, factoring in the inflation and interest rates.
Going by statistics revealed in EPF’s 2005 annual report, about 90% of EPF contributors have less than RM100,000 in their accounts. So sole dependence on one’s EPF savings as a safety net is not good enough.
Assuming that one can live on RM1,000 a month, to survive for 25 years, one would still need a substantial RM300,000 and for 35 years, RM420,000.
Bank Negara’s Counselling and Debt Management Agency (AKPK) CEO Mohamed Akwal Sultan reckons a person should not start purchasing big assets like property or a house late in life as the danger is that once they have retired they may not be able to meet the instalment payment on it.
“When you are in your late 40s, you should be winding down and not committing to high expenses to buy big things,” he says.
AKPK has dealt with a number of cases where retirees have had banks auction off their houses because they could not meet the monthly loan payment.
There is also the problem of credit card temptation. Ng notes a worrying trend that more and more younger people are becoming bankrupt as they are spending “tomorrow’s money”. Which basically means these people are not saving or building their retirement nest.
Ideally, Ong says, people should start saving from the time of conception; that way would be able to enjoy the magic of the compounding effect (see Chart 2).
Prudential’s Tan says a noticeable trend is that while the younger generation is prepared to invest in new financial instruments, the older generation gravitates towards fixed deposits.
“That is very risky because you would not be able to accumulate enough because the interest rates can’t meet the inflationary rate and your money is getting smaller,” he says.
He believes given the current life span, it would do retirees good to be more aggressive in their investment.
“In investing, you should not be looking at the date of retirement but rather the date of potential death which is probably still another 21 years away after retirement,” he says.
He recommends that people only keep about six months of their monthly expenses in the savings and FDs and put the rest in investment products that generate more income than the inflation rate.
Ng believes a good private pension would help people in their retirement years. In developed countries, money put into savings for retirement is not taxable, neither is the profit from that investment.
“When you retire, you can’t take the money out in a lump sum either or you’d have to pay tax on it. This will force you to withdraw your money on a regular monthly basis for retirement because that’s tax free,” he adds.
Singapore has such a scheme, the voluntary Supplementary Retirement Scheme, which complements the Central Provident Fund (CPF). Such a scheme has not taken off in Malaysia for a number of reasons, says Ng.
It would be a loss of revenue to the Government because people would not be paying taxes on money put aside for retirement. It would benefit only the rich and middle income group as the poor might not be able to afford it, he adds.
“Perhaps it hasn’t taken off too because the Malaysian economy is pretty dependent on consumer spending. And the Government wants you to spend,” he adds.
Ng says there should also be an asset liquidation law in the country. It is puzzling that there are all sorts of incentives for asset accumulation, he says, but none for liquidation.
An example of asset liquidation would be to reverse mortgage your house to the bank in return for a guaranteed monthly income until you die.
The asset would at the end of the day belong to the bank or insurance company. But in the meantime, the person has the right to continue to live in the house until death and get a monthly income too.
“If they outlive the value of the house, the bank loses,” he says.
As our population ages and life expectancy increases, more thought must be given by both individuals and the Government on how to develop a culture of planning and saving for one’s retirement.
Filed in: Malaysia Unit Trust in Media
the Star Sunday June 10, 2007
Numerous readers sent in their feedback and queries after Sunday Star ran the front page story ‘Can you retire?’ on May 27. After the ‘wake-up’ call for early planning of one’s retirement, we now run a six-part series written by the Financial Planning Association of Malaysia to provide more in-depth pointers on the subject. In the first part this week, we look at how you must first find your ‘number’ based on your annual expenses, estimated years left after retirement and inflation rate, among others. WHEN people who are savvy about retirement planning get together, a common question they ask is: “What’s your number?”
Unless the encounter takes place in a nightclub, it usually isn’t a series of telephone digits being asked for but rather the amount of money that person will need to fund a comfortable retirement.
It’s an important question. So important, in fact, that we at the Financial Planning Association of Malaysia (FPAM) want to help proactive adults receive usable answers.
So, in this article, the first in a series of six on retirement planning, we’ll help you get a handle on your own “number”.
FPAM president U Chen Hock notes: “Personal responsibility is at the heart of sound financial planning for individuals.”
According to Securities Commission-licensed financial planner Rajen Devadason, “Too many Malaysians are rushing headlong towards a retirement funding train wreck! We must take charge of our financial destinies – now.”
Remember Devadason’s admonition as we consider that superb cornerstone of Malaysian retirement funding: the Employees Provident Fund (EPF).
Our EPF has ensured that more than 11.4 million members have at least some savings for their old age. It has done an outstanding job.
Nonetheless, we estimate the average 55-year-old Malaysian in the middle of 2007 has an EPF balance of about RM110,000, which is usually sufficient to fund just the first three to five years of full retirement.
It isn’t surprising then that many members of the FPAM have discovered – through countless interactions with regular Malaysians – that many who “retire” at 55 or 56 actually don’t! They can’t afford to.
(We have 42 charter and corporate members, and 10,000 individual members of whom 3,800 are licensed to carry the respected CFP or Certified Financial Planner mark.)
Even those who have never gone through a structured calculation of their “number” often intuitively sense they don’t have enough set aside to create a totally adequate “personal pension” for themselves.
Interestingly, civil servants covered by a government pension usually end up in better shape during retirement than their private sector peers who usually enjoyed higher salaries.
Those with a government pension might not live lavishly but they are assured of a steady stream of cash each month. That dependable stream cushions the harsh realities of ceaselessly rising expenses.
So this is the FPAM’s message to all Malaysians: Everyone, especially a person without a government pension, needs to exercise delayed gratification and create a “personal pension” through intelligent saving and investing.
When creating an investment portfolio to meet retirement needs, there are two different approaches: capital preservation and capital liquidation.
The first assumes the sum built up through decades of sacrifice is so large the person’s retirement can be funded solely from the yield generated. This will leave the full capital sum untouched and to be left as a legacy to children or favourite causes.
According to Wong Boon Choy, treasurer and founding member of FPAM, the second approach, capital liquidation, is more practical.
Wong, an SC-licensed financial planner and CEO of unit trust management company MAAKL Mutual, states: “Most people would be so overwhelmed by the huge amount needed to put together a capital preservation-based retirement fund that they would give up and say it’s a pointless exercise!” That’s why his favoured approach is capital liquidation.
Each person has a different expectation of retirement. More and more Malaysians are realising that the official retirement ages of 55 and 56 are impractically low.
The Malaysian Government, however, appears to be in a dilemma. If it raises the official retirement age too quickly, the net effect will be increased unemployment among those entering the workforce after school or university.
FPAM president U, who is also general manager of HSBC Bank Malaysia’s Personal Financial Services, observes, “The most successful managers of their own finances tend to be individuals who proactively learn sound guidelines for retirement planning or who choose to work with qualified financial planners.”
For those looking for such qualified professionals, the CFP Directory at our website (www.fpam.org.my) is a useful place to begin your search.
But before seeking professional help, you might want to familiarise yourself with the key steps needed to arrive at a sound capital liquidation-based retirement fund sum, also known as your “number”.
1: Figure out how much you would spend per month if you retired today.
2: Multiply that figure by 12 to get a reasonable estimate of annual retirement expenses.
3: Decide when you’re going to retire: how many years do you have left to plan, save and invest?
4: How long will you live in retirement? (We suggest you err on the high side!)
5: Decide upon appropriate inflation rates, both during your planning stage and during your actual retirement. (You should use a higher rate during retirement because of anticipated escalating medical expenses.)
6: Figure out the rates of return you believe are achievable both during your planning phase and your retirement years. A competent financial planner will guide you to use a lower figure for the latter stage of life, when active earnings cease and your capacity for risk falls.
7: Decide on how much you can afford to set aside as an initial investment to begin your plan, and how much you can channel towards this key financial goal on a regular basis.
The actual “number” calculated will vary from person to person. Devadason observes: “Thankfully, most of us have our EPF funds to provide that vital first layer of retirement expenses. But, by itself, it won’t be enough!”
In his day-to-day work as a retirement specialist for urban professionals, he says his calculated “number” for a client usually falls within the RM500,000 to RM5mil range, depending on lifestyle, inflation and return expectations.
Thus, it’s imperative that as many Malaysians as possible are made aware of the importance of retirement planning.
We suggest, therefore, that you share this article – and each of the next five – with family and friends you genuinely care for.
Your article seems to be a boost for the investment or insurance funds industry. While highlighting the impact of time value of money in a chart (Michael and Terrance), there is a misleading statement – “Assuming that one can live on RM1,000 a month, to survive for 25 years, one would still need a substantial RM300,000 and for 35 years, RM420,000.”
An idea that I would recommend is to buy the largest home (landed property in perennial growth centres like Klang Valley) you can afford comfortably and the most modest car you can live with, and keep them both as long as you can.
These are two of the largest investments to most people. The home will appreciate and keep up with inflation while the car will depreciate and cost a lot to maintain too.
Property in Malaysia is relatively inexpensive while cars are not, and urbanisation in Malaysia is low compared to neighbouring countries, so there is continual demand for homes, especially in the Klang Valley, as rural folks relocate to where jobs are. You enjoy your home 22 hours a day and your car two hours a day.
You don’t enjoy as much with stock certificates. But do keep some stocks (equities) since they historically give the best returns, especially in Malaysia, where there is no capital gain taxes.
WM
Referring to your article “Counting on the nest egg”, published on May 27, I truly agree with the author that the Malaysian pension system is inadequate for most retirees in the country. As a Telecom specialist, I spend most of my time living abroad and have the opportunity to travel to different countries from poor ones like Morocco to rich ones such as Germany. I returned to Malaysia for a week’s vacation early this month and decided to drive to Penang for its delicious hawker food.
I was shocked to learn that my favourite char kway teow with extra prawns cost RM8 (without extra prawn RM4). The hotel room (same hotel, same room type) cost me RM450, instead of RM250. This is almost a 100% increase in prices compared to five years ago when I was there and yet, many still earn the same starting salary when I graduated from university nine years ago.
On top of that, car, housing, and petrol prices in Malaysia are completely outrageous compared with that in Europe (google the price and compare them to Malaysia’s). Remember, you can’t compare living standards by converting the currency – they earn in euro and spend in euro, we earn in ringgit and spend in ringgit.
Edwin Goh
I AM a 57-year-old retiree. It is with great interest that I read your article on the need for people to save and to invest whatever funds they have to provide for a nest egg during retirement. There is no doubt about that. However, with regard to investment, it is sometimes frightening when the investment turns against you and instead of getting more value for money, one loses part of the principle sum. Although fixed deposits give you a lower return, it is much more secure, considering that one has between 20 and 35 years to live after retiring.
At retirement age, I feel we should not take any investment risks but instead go for calculated guaranteed returns such as fixed deposit and work out a plan to stretch the ringgit. At this age, we cannot take risks because when the investment turns against us, there is no way we can replace the loss.
Heng
Filed in: Malaysia Unit Trust in Media
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