This article first appeared in Personal Wealth, The Edge Malaysia Weekly on April 16, 2018 - April 22, 2018

Thirty-three-year-old Carol Hau (not her real name) has been freelancing for about nine months. She had quit her desk job after almost 10 years in the corporate world as she was tired of the daily grind.

“I was in my salaried job for nine years and decided it was enough. I knew my monthly commitments added up to about RM4,000, but I wasn’t super detailed with projecting how much I needed,” she says.

Although Hau makes enough to cover her current commitments and monthly expenses, she has not factored in saving for retirement. “The income from freelancing is enough to cover my expenses, but the anxiety is in not getting paid regularly. That is the worst part,” she says.

“I do not save for retirement. Frankly, it is not something I think about at this point in time. I have no idea how much I will need every month when I retire. I cannot imagine how much things will cost then.

“Some people say that these days, you need RM2 million to have a comfortable retirement. That sum sounds too big to accumulate, yet it is too small to support myself in my old age, assuming that I live long.”

Hau is among the 34% of the global workforce who are freelancing in some capacity. According to Australia-based talent management company Cognology, 38% of that number are millennials.

US-based workforce solutions provider Kelly Services Inc says 31% of the global workforce are gig workers. According to its From Workforce to Workfit report, 84% of talent managers in Asia-Pacific hire or use gig workers, compared with those in Europe, the Middle East and Africa (80%), the Americas (53%) and the US (47%).

All this data suggest that the lure of permanent employment has never been less desirable. Thanks to the rise of the gig economy — which is sometimes referred to as the collaborative or free-agent economy — today, more individuals than ever are adopting or looking to take up freelancing as a career.

The gig economy has brought about increased efficiency and flexibility while lowering the cost of doing business. However, it is raising concerns about deteriorating safety nets and living on a derisory income in one’s retirement years.

Globalisation and the ever-evolving notions of employment and expectations have somewhat redefined how we work, resulting in the diminishing appeal of long-term employment. While this has opened up avenues for those who prefer to work independently, part-time or juggle multiple jobs, the trend — which is growing on the back of the gig economy — raises concerns about additional risks for the middle and lower-income groups.

This category of workers includes temporary and contract workers, freelancers, independent consultants and micro-entrepreneurs, who are more aptly known as gig-preneurs. This phenomenon is taking Malaysia by storm, says the Employees Provident Fund (EPF) in an email interview.

“There has been a double-digit increase in the proportion of self-employed workers in urban areas since 2010. The proportion of self-employed among urbanites increased from about 11% in 2010 to 16% in 2016, representing an increase of more than 760,000 people in six years,” says EPF.

“There are currently about 14.52 million people in the workforce and of this, 2.48 million are self-employed. The self-employed can be categorised into two segments — those involved in traditional jobs, such as farmers and fishermen, and those highly driven by technology such as programmers and YouTubers. Hence, the actual number of those involved in this sector may be higher.

“Given these facts, the EPF certainly needs to keep up with the changes as the number of self-employed rises as this category of labour is not covered by any formal social protection programmes in Malaysia.”

This is exacerbated by the fact that the country’s saving rate (as per overall household income) is one of the lowest in the world. The total national savings as a percentage of the gross domestic product was only about 28% in 2016. This is after taking into account the savings in pension funds such as EPF.

“Despite the increasing number of self-employed who are registered under the 1Malaysia Retirement Savings Scheme (SP1M), the health of their contributions remains a huge challenge for emerging markets such as Malaysia. This may be due to the inconsistency of income, employment frequency, the reluctance to deposit their savings manually or simply not having enough money left for savings,” says EPF.

With income security being a constant issue, the provident fund points out that freelancers tend to use their cash flow for reinvestment into their business. As a result, they compromise on long-term savings and retirement planning.

Hau’s situation is one that Phillip Wealth Planners Sdn Bhd wealth planning director Raymond Tay knows all too well. Citing a study commissioned by INTI International University and Colleges, which conducted a survey of 300 full-time freelancers last year, he says 66% of the respondents did not have a retirement plan while 33% did not even have a personal savings plan. “A 2013 HSBC report found that 85% of retirees regret not saving when they were younger,” he points out.

Overlooking financial liabilities

While Hau has made enough provisions to cover her current needs, Tay plaintively describes how he has witnessed many who have opted for the freelance route without a proper assessment of their financial liabilities, and even less of their retirement needs. They then find themselves ill-prepared to face a future where they will not be able to work at the same pace anymore.

“I have witnessed many cases of aspiring freelancers who were hoping to achieve what their predecessors had achieved so they jumped onto the bandwagon without realising the amount of financial baggage they would still need to shoulder. For example, their existing credit card debt as well as housing, hire purchase and personal loans, or other liabilities,” says Tay.

“The lack of financial planning will also leave freelancers with future problems such as the inability to plan their basic cash flow to ensure that they have enough money for emergencies. With the lure of materialistic pursuits and peer pressure to seek a quality lifestyle to conform to the pecking order in social circles, millennials have a higher tendency to overspend and end up becoming financial slaves by exhausting future income to satisfy their current lifestyle needs.”

As freelancing jobs are uncertain in a gig economy, there will be drawbacks if a person who needs to service his liabilities cannot obtain the desired income after freelancing, he says. “This could be mental exhaustion as stress and pressure mount when debts start increasing and harassment calls and legal letters pour in over time.

“The work itself could lead to mental and health problems as a result of the irregular working habits and hours to meet deadlines and/or sales or income targets. I have come across drivers who work for ride-hailing services such as Uber and Grab. They have to work irregular or prolonged hours to earn extra incentives and make ends meet at the expense of their health.”

While many know that freelancing would make it difficult to access banking and loan facilities because of the inconsistent stream of income and lack of or low contribution to EPF, they often take for granted that they do not have to declare their taxable income. “The tax burden will start to haunt freelancers as the diligent taxmen at the Inland Revenue Board (IRB) formulate regulatory policies to ensure that most of the participants in the gig economy pay their dues as honest citizens and contributors to the well-being of our great nation,” says Tay.

Last year, the IRB issued warnings to freelancers who are part of the ride-hailing ecosystem — as well as those engaged in the on-demand, peer-to-peer or platform economy — who have an annual income of at least RM30,000 to declare their income or face prosecution. Inadvertently, all this results in being poorer in their golden years, says Tay.

As overwhelming as all this can be, freelancing is also an opportunity to experience freedom, says Rajen Devadason, a financial planner with Manulife Asset Management Services Bhd. “All of us yearn for one form of freedom or another. No one wants to live a constrained life marked by a dead-end underpaid job,” he points out.

“Unsurprisingly, therefore, the promise of a fresh beginning and personal control over our time is what causes so many of us to migrate to the greener pastures of the gig economy. However, to make such a leap of faith work, the groundwork of gaining marketable skills must be done over at least two years and sufficient cash reserves should be in place before taking the plunge.”

And this trend is not limited to the millennial generation. Devadason says the appeal of this form of employment is also prevalent among those in their mid-forties — mainly because of the rapid increase in the cost of living. This is made worse when they have to compete for jobs with foreign workers, which has resulted in a stiff competition for local employees, especially those in this age group, who generally command a higher salary.

“With the opportunity for employers to cut the cost of human resources, the natural choice will be to undercut the employee benefits of those in their mid-forties, including salaries. Or worse, resort to retrenchment and replacing them with a foreign workforce who has fewer demands,” says Tay.

“Also, most of them may be single or joint breadwinners of a family. Hence, they have heavier responsibilities to bear. The natural choice will be to take up freelancing jobs, whether they like it or not, because to seek new employment won’t be easy either.”

Similarly, EPF states that freelancing is an attractive proposition for those in their forties as they would have developed particular skillsets. It also points out that the gig economy has given those in retirement an opportunity to remain active.

“There have been changing attitudes towards how people should utilise their ‘idle capacity’. The advent of ride-sharing services such as Uber and Grab have attracted the older working population to generate supplementary income in their retirement,” says EPF.

However, Tay believes that to a large extent, freelancing is seen more as a side hustle, given their age and years of the permanent employment before retirement. So, as they earn some additional income, they are able to develop a new business, which they can expand in the ensuing years. “From the trial-and-error phase to the realisation phase, some make it to the greener pastures found in the freelancing space while some do not,” he points out.

Making it work

Despite the challenges, it is not all doom and gloom for those yearning to free themselves of the shackles of the corporate life. To do this successfully, Devadason stresses that it is crucial to work smart and practise financial prudence.

“Work very hard and very, very smart. Live well below your means. Sacrifice. Exercise delayed gratification, particularly in the first 20 years of self-employment. Eschew mediocrity. Make it a goal to keep honing your skills so you can build a national reputation as one of the top people in your niche,” he says.

Devadason also talks about the importance of building a 12-month personal expenses buffer fund. “This process will take years. Don’t rush into dumping your conventional job for a freelance one. Take your time and prepare thoroughly through study and intense networking.”

Whether one is looking for a professional gig or contemplating taking jobs posted on on-demand service sites, one should observe some ground rules, says Tay. First, he recommends evaluating your financial health by putting together a personal balance statement. This provides an overall snapshot of your wealth at a particular period in time, he points out.

“It is a summary of your assets (what you own), your liabilities (what you owe) and your net worth (assets minus liabilities). This gives you a bigger picture of whether your current net worth is sufficient for your current lifestyle and future retirement needs,” says Tay.

It is also important to zoom in and analyse cash inflows and outflows by keeping a personal cash flow statement. Tay says this will help you identify areas where you can curb spending and areas to improve income sources so as to ensure positive and accumulating cash flow over time. “A cost-benefit analysis will help you identify areas that can boost earnings while keeping costs low to enjoy more positive cash flow, thereby increasing the potential to accumulate more wealth over time,” he adds.

From a personal balance sheet and cash flow statement, one will be able to assess current needs and formulate realistic retirement targets. This is where most people realise that they may have been too idealistic in setting their retirement goals that they end up creating impossible or impractical targets that lead to disappointing outcomes, says Tay.

“Next, apply the rule of 72,” he adds. According to Investopedia, the rule of 72 is a shortcut to estimate the number of years required to double one’s money at a given annual rate of return.

“Malaysia’s official inflation rate rose to 3.5% as at December last year. The compound interest or rate of return generated over a fixed period leading to the retirement age has to be above the inflation rate to generate additional retirement income,” says Tay.

“The rule states that you divide the rate, expressed as a percentage, into 72. In short, it means the years required to double your investments is 72 divided by the compound annual interest rate.”

The following step is to establish plans to generate passive income and savings for wealth accumulation. Tay suggests contributing at least 10% to 20% of your monthly disposable income to a regular savings or investment plan over the long term that can deliver the desired rate of return consistently.

Other cost-saving measures include registering a business entity, voluntary EPF contributions, medical insurance and contributing to the Private Retirement Schemes (PRS). “Freelancers are encouraged to register with the Companies Commission of Malaysia to set up a business entity so as to create a viable and legitimate business. By doing so, they could enjoy better tax rates (for sole proprietors), claim business expenses and deductions and perhaps even demonstrate greater credibility to their clients,” says Tay.

“It is a fallacy among freelancers to think they have more disposable income by not contributing to EPF anymore, compared with their previous employment status. By maintaining regular contributions, it is not only a disciplined way to accumulate more retirement savings but also a cost-efficient way to save more by enjoying up to RM6,000 in tax relief for EPF contributions and life insurance.

“Furthermore, EPF has been paying an attractive annual dividend rate for the past decade, averaging about 5.5% per annum. So, it is an added incentive for freelancers to start contributing to the provident fund. Due to the uncertain nature of freelancers’ businesses and jobs, it is essential to ‘save first, spend later’ to create a safety net for future retirement.”

Another savings option with a low barrier to entry is the PRS. The voluntary long-term savings and investment schemes are designed to boost your nest egg. However, unlike EPF, which guarantees a return of at least 2.5% annually, the PRS lacks a capital or minimum return guarantee and can impose upfront sales and annual management fees of up to 3%.

Nevertheless, to boost participation in the defined contribution pension scheme, the government introduced a maximum tax relief of RM3,000 for those who contribute to the PRS. Those who pay the highest tax rate of 26% could reduce their taxable income by up to RM780 if they applied for the rebate.

Also, the government has pledged to contribute RM1,000 (up from RM500 previously) to youths aged 20 to 30 who contribute at least RM1,000 to the PRS before Dec 31 this year.

The SP1M was recently introduced by the government in response to the higher number of individuals opting to freelance rather than seek permanent jobs. Under the scheme, contributors to EPF are eligible to receive a government contribution of 15% on the amount contributed, subject to a maximum of RM250 a year (which has been extended until 2022).

The SP1M was introduced to cater for the needs of individuals in the freelance economy, says EPF. “Under the scheme, freelancers can credit part of their income to their EPF account — any amount, any time up to a maximum of RM60,000 per year, and are entitled to the benefits that other EPF members receive.”

Tay highlights the benefits of this scheme to the self-employed or those without a fixed monthly income, such as taxi drivers, on top of the scheme’s annual dividend. “The amount contributed to the scheme may vary, but the minimum is RM50 and the contribution could be made at any time, depending on the means of the members,” he says.

Devadason recommends leveraging the EPF Members’ Investment Scheme to invest a portion of your savings in a diversified portfolio of unit trust funds. “You should have a separate cash-based portfolio to augment that EPF-funded portfolio. You should also buy the right life and total and permanent disability insurance policy, as well as the medical, hospital, surgical and critical illness insurance needed to protect your family and yourself,” he says.

While freelancing may contribute to better work-life balance, Tay stresses that it is essential to prepare early for unplanned scenarios. Reiterating the need for life and medical insurance plans and general insurance coverage, he points out that far too many people have lost their fortunes or incurred heavy debts due to high medical expenses.

“This is mainly because they end up footing their own medical bills without a protection plan. There are tax incentives given to individuals and their spouses for their life and medical insurance premiums, but the maximum tax relief is only up to RM6,000 for life insurance (and/or EPF contributions) and RM3,000 for education and/or medical insurance,” says Tay.

“So, do take advantage of this tax benefit by having a medical insurance plan, which also helps to save your life and provide extra protection against uncertainties.”

AXA Affin General Insurance Bhd recently introduced the AXA SmartDrive — Sharing, a motor insurance add-on that provides drivers of e-hailing services comprehensive protection. According to the insurer, there are currently 180,000 such drivers and the number is expected to grow with the government’s RM5,000 grant offered to taxi drivers intending to get into ride sharing so that they can buy a new car. The insurance plan also provides personal accident coverage of up to RM10,000, among others.

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