Category: business

How do you plan for your retirement?

How early should you start planning for your retirement?
(The answer may shock you!)

What are some of the proven retirement methodology that works?

How do you diversify your funds, savings, and assets to create more wealth and ultimately, becoming financially independent or financially free?

Today, we talked to a few experts, from the council and certified financial planner on how they help their clients plan and execute their retirement planning.

If you want to learn from the pros on how they do it, then keep on reading!

“As in all successful ventures, the foundation of a good retirement is planning,” 

Generally, there are 2 types of fundamental retirement plan for the Malaysian workforce, your EPF and pension scheme if you’re a government servant.

News has again and again saying that these plans alone will not be enough.

Why?

1. We live longer, we have a longer lifespan than ever before due to medical and technology advancements.
2. Inflation. Cost of living goes higher, year by year, and so does your day-to-day expenditure, healthcare cost, children education cost and so on.

Now, let’s see what our experts have to say –

Yap Ming Hui From Whitman Independent Advisors 

This is a very common issue – Most of our clients realized that they may not have enough savings for their golden age when they’re about to retire. (That would be a little too late.)

Worse still, escalating costs of children private education can easily drain your savings, especially for those who have two to three children.

Solution? 

1. Start saving for your future self the moment you start earning an income, no matter how small the amount. If not now, then when?
2. Stay investing in the stock market regardless of the bull or bear market with a time frame of 20-30 years. (Invest for long term)
3. Researching and educating yourself to invest in a solid and quality investments (Whether it’s stock or unit trust) is a MUST before making such a decision to avoid scams.
4. Channel 30% of your gross income into a pension fund (mandatory 11%+ additional 19%). Of course, the quantum very much depends on your age, financial commitment or desirable retirement lifestyle.
5. Another one simple assessment method is to do holistic financial planning via our free iWealth mobile app which could assess your current situation, your desired lifestyle and how much you need to be financially independent.
6. Always prioritize not to lose your hard-earned money. For example, choosing a regulated investment, diversify into different asset classes, and set your own investment criteria, discipline, and strategy, and stick to it (If it works) no matter what.

Linnet Lee from the Financial Planning Association of Malaysia

If you expect to spend 30 years living in retirement, you should start accumulating your nest egg 30 – 40 years in advance, a great effort to start planning when you start working.

There are two ways of planning for retirement:

Capital Expense Method:

Whatever you saved for retirement (the capital), you will utilize during your retirement and estimate that upon death, the amount left is minimal.

This requires active management during retirement to ensure that the money is enough (the assumption is your money continues to work when you retire).

Capital intact method:

You accumulated huge sum of capital and live based on the interest and dividends received during retirement.

This capital you accumulated over the years can be passed down to your loved ones as a legacy.

So now, what you need is to identify suitable types of investment tools based on your risk appetite.

Other quick tips from Linnet Lee:

1. Consider late retirement if you are still healthy and energetic.
2. Consider keeping a minimalist retirement lifestyle.
3. Start investing in dividend-yielding investment vehicles such as
   a. Real Estate Investment Trusts (REITS)
   b. Exchange-traded Funds (ETF)
   c. Stocks
   d. Unit Trust Funds
   e. Private Retirement Schemes (PRS)
4. Ensure sufficient health protection through own savings plus insurance/takaful policies.
5. Best work with a financial planner to prevent costly financial mistakes.
6. Factor in cost that might incur more during retirement such as:
   1. home refurbishment/wear and tear
   2. maintenance of the family cars 
   3. Purchase of healthcare products 
7. Closely monitor your investment portfolio from time-to-time to best match your risk profile and lifestyle changes.
8. Avoid Scams that offer unbelievably high and quick returns.

Bryan Zeng from FA Advisory

One day, you will retire. The matter is when.

Are you planning for it?

Living in uncertain and turbulent times like now, external changes that are beyond your expectations will continue to happen.

Is your retirement fund robust and flexible enough to last through your retirement years?

We are talking about 20 – 30 years at least.

If you have not started your retirement planning, start now.

Take action to maximize your retirement savings while you are young and fit to actively earn income, make time and compound interest your best friend as money-making leverage for you.

Key actions that you can start taking are:

• Setting up an emergency fund
• Paying off debts
• Get sufficient insurance protection (trust me, medical inflation over 10% will wipe off your savings in months)
• Maintain a healthy lifestyle.
• Make efforts to improve your medical conditions if you are Obese, Overweight or Pre-diabetes. These health situations are reversible and would save on your future medical bills.
• Diversify your investment portfolio, consider alternatives to EPF.

Yes, these steps sound simple yet hard to be done.
Some strategies that you can take to make it happen are:

• Track and reduce your spending.
• Increase savings
• Create a second and third streams of income.
• Delay in retirement.
• Look for investment products that match your risk-return profile as well as being highly liquid with low or zero tax applicable.
• Simple investments with low capital outlay are his favourite.

Derick Tan from Association of Financial Advisers Malaysia

The best time to start investing for retirement is always “Now”. The sooner we start, the earlier we can achieve our retirement goals while undeniably having more choices to choose from.

Some keywords related to retirement planning and selection of investment instruments are:

• Long term regular savings
• Sustainable growth of your funds
• Diversified portfolio of your investment

As the world economy is uncertain and the market situation is unpredictable, Derick advises that you should place 70% – 80% of your savings in fixed income or money market asset classes, while the balance 20% – 30% can be channeled into equity class that invests in the Asia Pacific and China.

While the EPF’s management team has performed a good job in managing the retirement fund, you cannot depend solely on EPF savings for retirement. So, look into the following:

• How much EPF savings would you accumulate by the time you retire?
• How much fund is needed for your desired retirement lifestyle?
• What are your investment criteria to achieve your retirement goals?
• What are the pros and cons of each investment you have?
• Are you diversifying your investment into different asset classes or funds to manage potential investment risk factors?

In summary, you will need to have the right blend of knowledge and skill to profit from investment products, i.e. by fully comprehending the cut loss mechanism or even switching or topping up to average down to maintain long-term accumulation growth.

Phang Kar Yew from Malaysian Financial Planning Council (MFPC)

Planning for retirement is a long term journey. It takes a long term vision, long term commitment and long term investment strategy to be successful.

It is well-documented that over 90% of investment returns are generated through asset allocation.

As such, a portfolio of investments is required since asset allocation is all about spreading your investments across a variety of asset classes.

For those who do not have funds or technical skills to invest in the stock market directly, unit trust investment managed by professional managers with market diversification is a good start.

Do remember that you should be clear of your investment objectives, risk-return profile and manage your expectations over the investment performance.

Alternatively, investing in property can be a good choice.

Investing in real estate provides an excellent capital gain opportunity whilst enabling recurring rental income.

However, risks associated with real estate investment are higher than other investment instruments too.

Note: You should assess the property location, monthly installment amount, property price and the rental income before committing yourself to a property.

Investment properties with positive cash flow after deducting the cost of renting it out are rare gems.

Is there an alternative plan in place to cover the loan installments if the property could not be rented out for a long period?

If you can’t afford to have any unexpected downturn to the huge financial commitment, you should think ten times before you commit to it.

An exit plan is equally important as it could impact or limit the investment choices available for your retirement portfolio.

WHAT ABOUT YOU?

Have you started your own retirement planning strategy? What are some other tips that you can share with us? Let us know!

A large segment of the working population in Malaysia is self-employed or works in the gig economy, so what are their retirement plans? Drawn by the flexibility to choose which projects to take on, the opportunity to accumulate diverse work experience and the autonomy to set their own working hours, many gravitate towards the entrepreneurial route to pursue their dreams and chart their own paths.

Indeed, out of a total workforce of 15.54 million, according to the latest figures published by the Department of Statistics Malaysia, the World Bank estimates that more than one in four – about four million – are self-employed. From financial planners and small business owners to online merchants and e-hailing drivers, the nature of work among the self-employed is numerous, varied and multi-faceted.

In line with global trends, reports indicate that this is increasingly also the preferred choice of employment among Malaysian millennials and Gen Z – those born in the mid-1990s onwards. As exciting as this development is, Malaysians who are self-employed often neglect something everyone should do the moment they start working: saving for retirement.

Retirement savings for the self-employed

Being a freelancer, independent contractor or technopreneur means you do not get to enjoy the usual perks of salaried employment. Income typically fluctuates from month to month, and there are no pensions or mandatory schemes to provide a financial safety net.

It might be tempting, or even necessary, to channel any excess money towards expanding or covering the cost of business. The risk of saving too little for retirement is high.

This state of affairs is supported by a survey conducted by Private Pension Administrator Malaysia (PPA), the central administrator for Private Retirement Schemes (PRS), where 62.8% of those who are self-employed said they wish they are saving more for retirement. Unless you are expecting to receive a substantial windfall or a generous inheritance, it is important you start taking proactive measures to save for your retirement.

“While you are busy growing your business or juggling several projects simultaneously, don’t make the mistake of not saving for retirement at all,” says PPA Chief Executive Officer Husaini Hussin.

“Create a retirement plan based on your needs, goals and risk appetite and then stick to it by automating your savings.”

Source: PPA Malaysia

Why consider PRS

Having a retirement plan is vital for a successful self-employed person. It can mean the difference between toiling into your old age and taking leisurely strolls on the beach.

With PRS, a voluntary long-term savings and investment scheme designed to help you save more for retirement, you can contribute at your own pace and within your own financial ability.

“Think of retirement savings in terms of percentages instead of a fixed amount or putting aside only what is left over at the end of the month,” advises Husaini.

“This ensures you don’t overstretch yourself in a lean month and you save a little bit more when business is good.”

To have adequate replacement income to sufficiently sustain your standard of living throughout retirement, PPA’s research suggests setting aside one-third of your income every month. When you save a percentage of your income each month this way, market volatility works in your favour as you gain more units when prices are low.

“It is a great way to save for your retirement over the long term,” Husaini adds.

“The top performing PRS funds have given PRS members good returns since inception up to 31 October 2019.” (See table)

Another aspect of PRS is the Nomination feature, which supersedes all wills. Other than the mandatory scheme, PRS is the only savings scheme in Malaysia with a feature to ensure your loved ones or nominees receive your gift hassle-free in the event of your untimely demise.

Recently, Budget 2020 proposed that PRS Members be allowed to make pre-retirement withdrawals for the purposes of healthcare and housing without any tax penalty. Additionally, zero tax penalty withdrawals for medical expenses incurred by immediate family members are also allowed, in recognition of rising healthcare costs.

“The introduction of 0% tax penalty for pre-retirement withdrawals of PRS from sub-account B, which holds 30% of the savings for purposes of healthcare and housing, reflects the government’s understanding and commitment to help all Malaysians use a portion of their retirement savings for their needs,” Husaini said. “This proposal shall take effect from next year.”

Beyond that, PRS Members who reached the retirement age of 55 or suffer from permanent total disablement, serious disease or mental disability can withdraw the full sum of their PRS savings without any tax penalty.

PRS Online

You can start saving with just a few simple steps by using PRS Online Enrolment, a service developed by PPA to help you save for your retirement in an easy, convenient and secure way. All you need is RM100 for the initial contribution and the minimum amount for subsequent top-ups is as low as RM50.

There are 55 conventional and Shariah PRS funds offered by eight PRS Providers to select from, but if you can’t decide, opt for the age-based default option. It is a unique feature of PRS which will automatically align the suitable asset allocation to your age group.

“The beauty of PRS is the choice and flexibility that PRS members have to enrol or top up into multiple PRS funds anytime and anywhere with just one PRS account,” Husaini says.

“Track your savings and monitor your investments with the myPPA mobile app. You always have the option of optimising your returns by switching PRS funds within the same PRS Provider or transferring your savings to another PRS Provider.”

Furthermore, PRS contributions you make are also eligible for a personal tax relief of up to RM3,000 per year, giving you tax savings which can further boost your retirement savings. You could enjoy zero sales charges or free insurance or takaful with coverage of up to RM100,000 with certain PRS providers.

Do it on your own

Being self-employed can be exciting, scary, and rewarding all at once, but without a mandatory scheme that makes savings and employer contributions compulsory, the onus of building a retirement nest falls squarely on you.

Money starts working for you the moment you set them aside for retirement. Whether you’re an entrepreneur, a photographer or e-hailing driver, take advantage of the flexibility to choose how often and how much to save with PRS.

Do it on your own. Senang jer. Save in PRS.