When people who are savvy about retirement planning get together, a common question they ask is: “What’s your number?”
Unless such an 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 across our sun-drenched country receive usable answers. So, in this article, the first of 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 toward 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 blown retirement.
It isn’t surprising then that many members of the FPAM (we have 42 charter and corporate members, and 10,000 individual members of whom 3,800 are certified members licensed to carry the respected CFP or Certified Financial Planner mark) have discovered – through countless interactions with regular Malaysians – that many who ‘retire’ at 55 or 56… actually don’t! They can’t afford to.
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 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, categorically 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 is also the general manager of HSBC Bank Malaysia’s Personal Financial Services. He 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, aka your ‘number’!
Step 1: Figure out how much you would spend per month if you retired today.
Step 2: Multiply that figure by 12 to get a reasonable estimate of annual retirement expenses.
Step 3: Decide when you’re going to retire – how many years do you have left to plan, save and invest?
Step 4: How long will you live in retirement? (We suggest you err on the high side!)
Step 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.)
Step 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.
Step 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 toward 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, Devadason says his calculated ‘number’ for a client usually falls within the RM500,000 to RM5 million range, depending on lifestyle, inflation and return expectations.
In closing, 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.