What’s your number?
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.
House, car and stocks
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.
Cost of living doubled
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.
Better safe than sorry
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.