This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Nov 9 - 15, 2015.

Catherine Khoo is a licensed financial planner with CWA. She was recently recognised by the Financial Planning Association of Malaysia as one of the top 3 scorers at the Malaysian Financial Planner of the Year Awards 2015. For queries, email us at [email protected]

Having purpose and vision during retirement is one of the most important determinants of mental, social, spiritual and physical well-being in later life. — Harold G Koenig, author

RETIREMENT wasn’t working for John, who is one of my clients. A deliberate and thoughtful technical specialist, he had spent 23 years working with a private company. When he retired, he expected to fall easily into a life of leisure — waking up late, doing what he wanted when he wanted and travelling overseas frequently with his wife Joyce.

Initially, John was very excited about post-retirement life. It was full of activities. Now, one year post-retirement, he finds his days very mundane and spends most of his time sleeping, watching television, sitting in front of the computer or staring at his smartphone. He doesn’t like golf, so he cycles in the morning and plays with his dogs. Gardening is too hot to him. And Joyce will only retire in 2017.

As many retirees discover, leaving one life to begin another is difficult — more so if you have not planned for it. As a consequence, retirement can be emotionally devastating and traumatic. Some of us retire by choice, while others are forced into retirement. 

How you live out your retirement is totally up to you. It can be the best years of your life or the worst. Tomorrow can be the beginning of new adventures, newfound joy and greater success. You get to decide how to spend your time. Your choice of attitudes and actions can make a difference in how your retirement years play out, whether they are boring or brilliant.

A good example of this scenario is my client Sara. I met her at one of my retirement workshops last year.  She was holding a very high position at a private company after working for 15 years. She spent most of her time managing the business and staff for the company, and hardly had time to plan for her personal wealth. 

Sara wasn’t sure if she had enough money to fund her retirement if she decided to retire within six months at the age of 56. The company wished to extend her employment for a few more years. Her husband, Ben, retired in 2012. They have two working children who no longer need their financial support. Sara has six financial goals, which are indexed at an inflation rate of 4% (see Table 1).

Sara wanted to see how her financial position was and intentionally excluded her husband’s financial position in this analysis. She has about RM380,000 worth of investments in unit trust funds, RM750,000 in her Employees Provident Fund accounts, RM500,000 in her bank accounts and two properties worth RM800,000. Her total net worth is RM2,154,570. 

Assuming that she maintains an investment strategy consistent with how the assets are currently invested, a 6.7% pre-tax rate of return was used in doing the analysis because this is the expected rate of return for the existing asset allocation in her portfolio based on historical rates of return. The analysis indicates that there is a projected capital shortfall of RM218,481. This means Sara would require this amount of additional money in the bank today to meet all her goals. This, of course, is not something that she can change. However, there are a number of controllable changes she can make to eliminate this shortfall. 

As her existing portfolio is skewed towards the local market and fixed income investments, I restructured her portfolio to suit her risk appetite, time horizon, investment objectives and expected rate of returns. Sara is also willing to take on a little more risk by diversifying her portfolio into regional and global investments, which increase her portfolio returns to 8.13% per annum (see Table 2).

After several rounds of discussion with Sara on her decision to retire, she agreed to make the following changes for her retirement.

1. Set goals 
Not financial goals, but how she will spend her time on fruitful pursuits to avoid drifting from one day to the next and wind up depressed or ill. Sara needs to reassess her life or maybe revisit goals she had set previously but did not accomplish. Setting goals would give her something to look forward to and a reason to get up in the morning. With this exercise, she managed to list three new life goals: to take up craftwork, go on mission trips twice a year and start a home bakery business.

2. Lifestyle choices
Even after retirement, the saving and planning continues. Though Sara can enjoy some luxuries such as cruises, she should set this as her financial objective and see if she can find ways to save money rather than dipping into her retirement funds. By virtue of having had a lifetime’s worth of experience, Sara is very good at keeping costs under control — that was how she was able to save enough to retire. Maintaining this habit is one of the best ways to ensure a financially stable retirement. 

3. Develop new interests/hobbies 
Sara wants to learn craftwork, such as crochet, and baking so she can turn these into a business. She plans to set up a website and/or blog to sell these products online.

4. Volunteering 
There are opportunities for Sara to contribute her time and talents to different charities. She decided to teach Sunday School at her church and join mission trips to help the poor.

5. Form a hobby group
Since Sara likes craftwork, she can join a group or club to have social engagement with friends, stay active and exercise regularly. It would be best if she could get a buddy to do this together and make it a routine.

6. Withdrawal rate 
Sara has a net worth of about RM2.15 million, with RM1.63 million in liquid assets. The early years of her retirement will generally be the most active and expensive as far as travel and hobbies go. If she dips too much into her nest egg, she may be reducing her income for later years, when she is likely to have some costly medical bills. Based on her situation, it is safe to start withdrawing at 4% per year without Ben’s contribution and review annually. If hit by a multi-year stock market slump and there is a need to use the base capital, Sara should start cashing in her fixed income investments and give the stocks as much time as she can afford to recover and make her nest egg last.

7. Writing a will
Sara and Ben should consider writing a will to distribute their wealth according to their wishes and set up a living trust to put in place provisions for charity and financial aid for their nephews and nieces in the event they are no longer around.

Your lifestyle may change when you retire, but not the fundamentals of personal finance. You still need to prepare a budget, control your expenses and monitor the rate at which you are using your financial reserves. The vital thing is to realise that even if retirement is the end of your working life, it is not the end of your financial life. It is never too late to start planning unless you plan to fail.

Now, 10 months have passed. But for Sara, it has been a very busy but fulfilling time following her retirement. She feels that she made the right decision to retire and has been able to pursue things that she likes. She has followed all my recommendations for financial plan and just focuses on what she enjoys. Her bakery and craftwork businesses have been very successful, and her finances are on track. Sara is living the way she wanted to in her retirement.

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