This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 11 - 17, 2016.
Retirement planning strategies that worked well in the past are no longer effective today with the changing global environment. It is time to discard outdated investing principles and adopt a more flexible approach to designing one’s retirement strategy.
Vettese says buying an annuity is better than holding fixed-income investments in Canada. Despite losing a little upside potential, annuities help you to eliminate some of the major risks, such as outliving your money or doing something foolish with your investments when you reach an advanced age.
He thinks it is a bad idea for people to have debt in their retirement as the average retiree may not be able to distinguish between good and bad debt. “Some people will consider alternative investments, such as buying condominium units or offering second mortgages, but that is risky.
“Debt is dangerous because for some, it suggests they have been spending beyond their means. For people who hold debt as a result of investment, such as buying a condominium unit, that means they are leveraged, which increases their investment risk.”
Instead of debt, Vettese prefers maintaining an investment portfolio with an overweight on equity.
What works and what doesn’t in Malaysia
How applicable are Frederick Vettese’s recommendations and views in Malaysia, as the economic landscape here is different from those of developed markets?
Lim Yan Chang, personal finance coach and director of Wings Alliance Sdn Bhd, says the 70% retirement income target may be a little high, especially for retirees in the middle to high income groups. When a person retires, he notes, many work-related expenses and commitments will decrease or taper off.
Nevertheless, he points out that having a retirement income target of less than 50% could be difficult as there are expenses such as entertainment and medical fees to contend with. “Retirees should plan ahead for these expenses by setting aside a lump sum and ensuring they have sufficient medical insurance that will cover them in the event of an emergency.”
While general inflation will affect retirees, Lim says what they should pay more attention to is the personal inflation that varies according to one’s lifestyle. He advises retirees to be careful with purchases and to reduce aspirational buying.
Robert Foo, financial planner and managing director of MyFP Services Sdn Bhd, has a different opinion when it comes to what the rule of thumb is for retirement planning. “As a financial planner, using a rule of thumb to measure how much one’s retirement income target should be is a generalisation. We should work out the figures by doing a comprehensive financial plan for clients. And with the improved healthcare system and longevity factored in, retirement planning becomes even more complicated and important.”
He points out that many middle and high-income families are cash poor but asset rich — they will have more than enough money to last a lifetime — so their retirement income can dip below 50%, but this should be estimated by the facts.
Foo says people should only consider setting a lower retirement income target if they can control and reduce their retirement expenses, as compared with pre-retirement spending. “The future is unpredictable and volatile. It is always wiser to work towards a higher retirement income target.”
He also says the 4% withdrawal rule is not cast in stone for true financial planning professionals as it heavily depends on what the clients want in their retirement. “It would be better to be a little more conservative when dealing with withdrawals from the retirement fund. It is better to die before your wealth runs out than having your wealth run out before you die.”
Foo says having a good and constantly monitored financial plan as well as a properly managed nest egg should enable retirees to withdraw more than 4% in the early retirement years.
Lim says if the return on investment is indeed 4%, then do as Vettese suggests — withdraw 5% or 6% annually in the early retirement years. Under such circumstances, it is unnecessary to limit the annual withdrawal to 4% as this will leave the retirement fund intact in perpetuity.
However, he points out that it will be safer to postpone a higher withdrawal rate to a later date as the longer the lump sum is kept intact, the longer the fund will last. This is important as medical care can eat up a huge chunk of the retirement fund, even for those who are insured.
Unlike in the US or Canada where long-term care (LTC) insurance products are mature, these products are not readily available in Malaysia yet, says Lim. The closest options are some riders that mimic several features of LTC products, which can be added to whole life [insurance] policies.
“LTC products are meant to replace some income or provide extra financial resources in case of illnesses or during convalescence, as nursing care can be expensive and it is very likely to inflate over the years,” he adds.
As LTC products are not an option for Malaysian retirees to hedge against health risks, Lim suggests a few alternatives, such as setting up an additional fund, purchasing critical illness insurance policies and having a long-term medical plan.
Foo agrees that the middle and upper-income groups have enough wealth to cover medical and LTC expenses during retirement, so they can do without such products. “Manulife used to have LTC products, but this was discontinued. LTC products in Malaysia are not widely promoted and therefore not very competitive. Most Malaysians have not professionally planned for retirement. They need to realise that if they don’t buy such products, they will need to build a larger nest egg to cover that,” he says.
Managedcare, a wholly-owned subsidiary of Aged Care Group Sdn Bhd, introduced CareTRUST on Feb 24, a living trust that allows individuals to set aside money for long-term retirement or healthcare. This is the closest to an LTC product Malaysians can sign up for.
In an environment where interest rates are low, Foo says he encourages clients who are both asset and cash rich to be more aggressive with their investment portfolio. “In short, the asset allocation for clients depends on their wealth position as well as longevity and retirement assumptions, among others. There is no such thing as one-size-fits-all, especially when it comes to an important subject like retirement planning.”
Lim agrees that low interest rates are here to stay and retirees should stay invested, albeit with a more balanced portfolio — a modest return of 6% to 7% would be sufficient for retirement if the fund is of an adequate size.