This article first appeared in The Edge Malaysia Weekly on October 26, 2020 - November 1, 2020

Retirees who rely on fixed deposits (FDs) to sustain their retirement needs may see their funds depleted sooner than expected owing to the current low-interest-rate environment. To mitigate this situation, investment experts believe that this group needs to rethink their strategy and consider alternative options.

As at Sept 22, the country’s overnight policy rate (OPR) was at 1.75% — the lowest level since 2004. In turn, current FD rates have decreased, ranging from 1.6% to 2%, thus significantly reducing the monthly income received by many retirees.

“Retirees are now taking home a smaller ‘paycheque’ from their FDs. Those who depend on interest payment from FDs may have to spend less,” says Reuben Tan, head of wealth management at OCBC Bank (M) Bhd.

Sammeer Sharma, managing director of wealth management at Standard Chartered Malaysia, concurs: “The interest rate in Malaysia, which has fallen to 1.75% from 3% over the past 12 months, suggests that retirees will receive half the amount they used to. Their capital may deplete faster than they had initially planned.”

The ongoing Covid-19 pandemic has also impacted retirees who adopt an income investing strategy. Bryan Zeng, general manager of licensed financial planning firm FA Advisory Sdn Bhd, says some banking stocks and real estate investment trusts (REITs) have cut their dividend payments this year, while the yield rates of new bond issuances have drifted lower.

“All these, coupled with a low-interest-rate environment, are a sign of the times. Retirees can no longer invest their money in the traditional way such as putting their money in FDs to sustain their retirement,” he stresses.

Some might argue that the country’s inflation rate recently, measured by the Consumer Price Index (CPI), has been negative. Hence,

retirees will still be left with a decent amount of money to maintain their retirement lifestyle by placing their savings in FDs. But Daniel Brown, head of investments and product solutions at CGS-CIMB Securities Sdn Bhd’s private wealth division, disagrees.

Brown, who is also CGS-CIMB Securities’ head of fixed income, says the CPI mainly considers the prices of petrol and essential foods. Other costs of living, including medical cost — which increases at a mid-to-high single-digit rate and is particularly relevant to retirees — have not been factored in.

“The CPI will also not stay in the negative territory for long. Malaysia is an emerging economy and the index will go back into positive territory moving forward,” he says.

One fact that could encourage retirees to consider investing differently is the increasing average life expectancy of Malaysians, says FA Advisory’s Zeng. “It has been increasing over the years. Depending on when a person retires, he could still invest in equities and ride one or two market cycles.”

According to the World Bank Group, the average life expectancy of a Malaysian increased to 75.99 years old in 2018 from 72.57 years old two decades ago. Meanwhile, the Department of Statistics Malaysia reports that the average life expectancy of Malaysians was 74.5 years old in 2019.

Assuming a person retires at 60 years old and his mind is still active and sharp, there will be another 1½ decades for him to stay invested in the equity market, says Zeng. “If the retiree is knowledgeable about the stock market, he can invest a significant sum of his extra money in the equity market and reap better returns from not just dividends but also capital gains.”

These stocks could be blue-chip companies that are component stocks of the FBM KLCI with a long history and an established profit track record. They could also be REITs, which offer stable prices and dividend distributions.

Alternatively, retirees can opt to increase their equity exposure through unit trust funds managed by fund managers, or have their wealth managed by a trusted wealth adviser.

However, retirees must understand their risk profile before allocating more money into equities, says Zeng.

CGS-CIMB’s Brown says retirees should invest mainly in bonds that provide them with capital preservation and a fixed income stream. At the same time, they could seek out various investment instruments that can give them stable and better returns, he adds.

“Fixed-income closed-ended funds are instruments that tend to be overlooked by investors,” says Brown.

The main difference between closed-ended funds and open-ended funds is that the former locks in investors’ monies for a certain period of time, usually three to five years, by introducing a hefty withdrawal fee. In contrast, open-ended funds allow investors to withdraw their money at any time with minimum or zero charge. This means that closed-ended funds provide much lesser liquidity to investors than open-ended funds.

However, the advantage of closed-ended funds is that they can generate higher returns as their fund managers have more certainty over the amount of money they can deploy into the market and investment horizon. The returns of these fixed income funds could be attractive at 4.5% and above per annum, says Brown.

Closed-ended funds also distribute income to investors based on a fixed schedule, which benefits retirees as it allows them to easily plan their finances, he adds.

“In comparison, open-ended funds do set a targeted return. But they do not distribute income based on a fixed schedule. If investors are unhappy with the returns of these funds, they can sell off their units.”

However, Brown points out that the targeted returns of closed-ended funds are not guaranteed. “They are taking on capital risk [as the underlying securities of these funds are bonds].”

He says closed-ended funds have gained in popularity in recent years owing to the certainty and attractive returns they provide to investors. But many people do not know about them as they are mainly wholesale funds that target the sophisticated investors.

Based on the Securities Commission Malaysia’s guidelines, only investors whose net assets exceed RM3 million or who have a gross annual income of more than RM300,000 can invest in wholesale funds.

The minimum investment amount of these closed-ended funds varies. It could range from RM10,000 to RM250,000 in general. The sales charge and annual management fees of these products are also not set in stone.

According to Brown, investors can contact various asset management firms to obtain more information about these products.

Meanwhile, Standard Chartered’s Sammeer says retirees can consider Asian US dollar bonds, which can provide them with yields of about 3% per annum. The issuers of these bonds are companies with stable cash flow and a low risk of default. There is also a rigid regional demand for these bonds, which contribute to lower price volatility.

“These investment-grade, Asian US dollar bonds have a unique defensive character. They are suitable for retirees in general,” he adds.

Financial experts say tech-savvy retirees should not rule out investing via fintech solutions, such as robo-advisory and peer-to-peer (P2P) financing platforms, as they carry lower investment costs and provide diversification.

Robo-advisory platforms are tech-powered portals that help investors allocate their money in exchange-traded funds (ETFs) globally according to their risk profile. Meanwhile, P2P financing platforms allow people to lend their money to small and medium enterprises (SMEs) at a specific interest rate.

OCBC’s Tan says retirees can consider putting some of their money in robo-advisory platforms owing to their low-cost investment features. “Retirees who are willing to spend time on research to understand fintech can consider them. They offer lower fees compared with many other investment instruments.”

Currently, the four licensed robo-advisory platforms in the country are StashAway, MYTHEO, Wahed Invest and Akru Now Sdn Bhd. These platforms do not impose a sales charge. Their annual management fee ranges from 0.2% to 1%, depending on the investment amount.

As a comparison, unit trust funds usually come with a sales charge of up to 6% and an annual management fee of 1% to 2%.

Brown says robo-advisors offer investors diversification. “You have equities and bonds in a portfolio. You could even have gold and silver too, depending on your risk profile. That’s good diversification.”

P2P financing is another higher-risk investment instrument that retirees can explore to boost their overall investment returns.

Sammeer says the upside of P2P financing is that it is easy to understand as it functions like a loan. Investors can also monitor their P2P portfolio on a mobile application through their smartphone. “P2P investing comes in small ticket sizes (as low as RM100) and allows investors with a small capital base to build a diversified portfolio.”

The downside, however, is that these platforms tend to be less liquid. “P2P financing has little to no liquidity. Most P2P platforms do not offer any form of exit midway through the investment journey,” says Sammeer.

Meanwhile, Tan says retirees who want to invest in P2P financing platforms must understand the risks involved. “One will need to have a good understanding of P2P financing [beforehand].

“Unlike bonds, where there are multiple credit rating agencies to assess the ability of companies to finance their loans, it is difficult to assess the financial health of the note issuers on P2P platforms owing to a lack of information that one can get a hold of,” he adds.

Brown also says retirees should be careful when investing in fintech start-ups as some of them might not survive in the long term. “We’ve seen the fall of global start-ups like WeWork and other big start-ups in recent years. A huge amount of investments have gone into them, but they could still fail.”

The guiding principle for retirees who want to invest is to understand their own risk profile, and thereafter, how much investment risk they are willing to take in exchange for higher returns, says Brown.

“You should make an investment decision based on risk first. Think about investment returns as your bonus. [That way, you will be] happy if the returns are good. If you lose it, it does not affect your daily life.

“Retirees who have accumulated enough wealth to sustain their retirement would want capital preservation, instead of capital appreciation. They should invest according to such a goal,” he says.

Diversification is another key concept that retirees should always have in mind, advises Sammeer. He says retirees should always have exposure to various asset classes, including equities and bonds.

“For instance, some might think that equities are too risky in such a volatile market. But it is simplistic to assume all equities carry the same [amount of] volatility.

“For example, companies in the consumer sector involved in the business of food were less susceptible to previous market meltdowns as compared to other consumer discretionary companies. This is because food provides sustenance, while other consumer products and services like cruise liners do not. The latter group is more susceptible to the ongoing pandemic.”

Sammeer also reminds investors not to hold on to too much cash out of wariness of the ongoing pandemic. “Cash may not be king when interest rates are low. And past market cycles have demonstrated that the cornerstone of good money management is to diversify across asset classes, geographies and sectors.

“Retirees might be inclined to react negatively against the market by exiting them. This is especially true given that the number of people affected by Covid-19 may continue to rise globally, leading to varying degrees of cross-border travel and sector shutdowns that impact businesses and employment,” he continues.

“However, monetary easing policies and fiscal stimulus implemented by central banks and governments worldwide have added unprecedented liquidity into the global economy. These have helped stem further deterioration in the global economy and led to a rebound in economic activities.

“Coupled with the low and falling interest environment globally (and in Malaysia), these have resulted in money flows seeking higher-yielding assets, including bonds and equities since late March. All these have boosted the performance of financial markets,” he says.

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