If you only start building a retirement nest egg when you’re fewer than 10 years from stopping work, you’re setting yourself up for a rude shock!

Still, the inability of most people to safeguard their golden years is understandable. As a species, our experience with retirement is limited. The widespread cessation of work by mature, mobile members of a population started with the 20th century. Even then it was mainly viewed as a perk enjoyed by those fortunate enough to live in a developed country. So, for more than 98.3% of the six millennia of recorded human history most people worked till they dropped.

Today, thankfully, we live in a capitalistic era that permits ambitious, motivated men and women to gradually ease away from ‘working for money’ to ‘having their money work for them’. But it never happens automatically.

Tan Kim Book, the chairman of the Malacca chapter of the Financial Planning Association of Malaysia (FPAM), notes, “Many Malaysians have the wrong attitude. They often think the government will take care of them or perhaps their children will!”

Recent developments suggest our government is rolling back competition-hampering subsidies to wean our populace off an entrenched entitlement mentality. On the family front, the rising cost of living is making it difficult for even the most filial adult children to provide all the money their parents need in retirement. Financial planner and tax specialist KP Bose Dasan of ITF Management states, “By all counts we should be seeing truckloads of destitute retired people on the streets. However, that’s not apparent; I believe the family bond is keeping people off the streets.” For now!

Financial planners who rub shoulders with people of all backgrounds believe a retirement funding storm is brewing. For those willing to pay the price in self-education, the solution is clear. Securities Commission-licensed financial planner Rajen Devadason observes, “The best way to plan for a great retirement that’s devoid of financial stress is to begin aggressive saving early, and intelligent investing soon after.”

Why? Because for compound interest to work its wealth-building magic requires three elements of growth, one of which is time – lots of time.

Tan, a licensed financial planner with Oscar Wealth Advisory, believes children in secondary schools should have an awareness of retirement inculcated in them. He insists, “The moment we get our first pay cheque, we should start saving without delay. Even if we start with a small sum, saving regularly will bring us closer to our goal.”

The master key is compounding. Consider a proud father who decides to set aside RM1,000 in a savings vehicle the day his baby boy is born. Even if he never again adds any money to that seed money, if it grows at a steady 3% a year, by the time the child turns 20 he’ll have a little over RM1,800.

In case that amount does not excite you, the way to gain more at the end of two decades is to ratchet up the interest earned. After all, if the father had put the RM1,000 into a high yield investment that generated a steady 9% a year, his 20-year-old offspring would have more than RM5,600.

While it takes a rare 20-year-old to not raid ‘the bank’ for a good time with his friends, we’ll assume his parents raised a paragon of virtue with an appreciation for the wisdom of delayed gratification and an understanding of exponential growth.

If the young man leaves the money to grow, then when he’s 40, he’ll have more than RM30,000; at 60, more than RM175,000; and assuming he lives to be 100 – as more and more people are – our (hopefully) healthy centenarian will have more than RM5.5 million.

But as higher yields are sought, the risk-reward relationship dictates more uncertainty (translation: the finite probability of loss rises); this is unavoidable. So, assuming the father originally chose not to stomach excessive risk, you can see from the table how much the money would have grown to along the way at different rates.

TABLE

If a father sets aside RM1,000 in a savings or investment vehicle on the day of his son’s birth, it will grow to…

AGE (years) Annual YIELD (CAGR)

3%

5%

7%

9%

1

1,030

1,050

1,070

1,090

20

1,806

2,653

3,870

5,604

40

3,262

7,040

14,974

31,409

60

5,892

18,679

57,946

176,031

100 19,219

131,501

867,716

5,529,041

Time certainly is the most important element in the calculus of wealth accumulation. The second element needed for compound interest to work in our favour is the interest rate achieved. The third is the amount of money set aside.

Interestingly, those three linked elements of growth suggest the same number of ways for apprehensive Malaysians to overcome retirement funding shortfalls:

1. Save and invest for a long, preferably multi-decade, period;

2. Comprehend the risk-reward relationship; and

3. Sacrifice today to have seed to sow for a rich harvest tomorrow.

If you’re ‘young’, say under 35, time’s on your side. And that’s important because, as Bose explains, “Retirement planning is a lifelong effort, 20 years of retirement requires 20 years of saving.” He explains that if a person assumes a mortality period of 20 years from 55 (to 75), then he or she should start planning for retirement at 35. Such planning should go well beyond just saving money. Ensuring wealth protection through appropriate insurance policies, and wealth distribution by writing a will and possibly establishing a trust are also crucial. Bose adds, “Retirement planning also requires using the tax structure for optimal retirement savings.”

Chua Tia Guan, head of tax and financial planning for Great Vision Advisory Group, grimly explains, “An average person has 30 years to generate income and another 30 years to consume his ‘retirement reserve’, if he has no income. (See diagram.)

DIAGRAM (source: Great Vision Advisory Group)

 

Chua says, “Many people are very poor in the allocation of their financial resources. They don’t envisage their future and retirement planning is always the last priority in their early working life!”

One solution might be to carefully choose your… parents! But what are people supposed to do if they’re pushing 50 and weren’t fortunate enough to have a mathematically talented parent set aside money at their birth? Retirement specialist Devadason suggests, “Since none of us can go back in time to make a serious earlier start at retirement funding, we should restructure our affairs to permit working beyond our official, irrationally low, official national retirement age of 55!” The self-employed have an edge here, but even the conventionally employed can begin investing in their own self-education to elevate their comprehension of possible investment vehicles and their odds of starting a viable business or gaining fresh employment.

Finally, in the waning years before retirement, elevating personal savings rates should be done aggressively. Both Bose and Devadason are extremists who advocate setting a goal to eventually save 50% of net income.

Obviously, most Malaysians won’t want to reach such stratospheric savings levels, but at least aiming for the sky today is one way of slashing our chances of ending up old and broke tomorrow.