This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Dec 21 - 27, 2015.
WE cannot view retirement through rose-tinted glasses anymore. Retirement is no longer about sipping cocktails on the beach, but about working hard to fund a longer time spent in retirement, and then worrying whether we have enough savings for the rest of our lives.
The rising life expectancy of Malaysians creates longevity risk not just for insurance companies and pension funds but also for the retirees themselves, who will need to ensure that their savings outlast them.
The ageing population is growing rapidly in many parts of the world. This is mainly due to a slowdown in the growth of the general population, brought about by declining fertility rates. According to a United Nations report, World Population Prospects: The 2015 Revision, which was released in July, the number of those aged 60 and above is expected to more than double by 2050 and more than triple by 2100.
“A significant ageing of the population in the next several decades is projected for most regions of the world, starting with Europe where 34% of the population is projected to be over 60 years old by 2050. In Latin America, the Caribbean and Asia, the population will be transformed from having 11% to 12% of people over 60 years old today to more than 25% by 2050,” according to the report.
To compound the issue, life expectancy is poised to rise further. The same report projects life expectancy to increase from 70 years between 2010 and 2015 to 77 years between 2045 and 2050, and to 83 years between 2095 and 2100. Life expectancy in places like Asia, Latin America and the Caribbean are expected to rise 13 to 14 years by 2095.
“Such increases are contingent on further reductions of the spread of HIV and combating successfully infectious as well as non-communicable diseases,” says the report.
According to the World Health Organisation (2013 data), the average life expectancy of Malaysian men and women is 72 and 76 years respectively.
The world is changing. It is no longer feasible to compare our future with that of our parents, says Brigitte Miksa, head of international pensions at Allianz Asset Management AG. The conditions today are no longer just about the decreasing number of children in a family but also the higher labour force participation of both men and women. This is an issue she has observed in many Asian countries.
“We see this in many countries, like China, with its one-child policy. For the rest of Asia, it is not the one-child policy, but due in part to the increasing educational status of women and higher labour force participation by both men and women,” she says.
“There is less time available to care for children and the elderly in the family. But at the same time, this kind of caring for each other is not possible if all the adults are in the workforce. Who takes care of the children and the elderly, who are the dependents?”
To address the retirement savings shortage, the time spent in retirement will have to be shortened as well, says Miksa. This means more people will be working longer.
“The retirement entry age is going to increase as people stay longer in the workforce. [But this is not a bad thing as it] is also in the interest of the economy. If you drop out of the workforce so early [together with a declining fertility rate], the economy will see a productivity loss that may not be compensated by technologically driven productivity increases.”
While Malaysia’s retirement age was increased to 60 from 55 two years ago, many workers still feel they can work beyond that. The Randstad Workmonitor first quarter 2015 survey, released in March, revealed that 76% of employees believed they would have to work longer than the current retirement age.
For a country like Malaysia, which also favours economic growth, encouraging the workforce to work for a longer period will help alleviate the government’s burden in supporting pension payments, says Miksa.
“The government policy here in Malaysia will potentially favour economic growth. Also, the government will have an interest in increasing the retirement entry age because it also means that it can increase the sustainability of pension payments,” she says.
“You have got to be able to afford a long retirement. If you retire at 55, and you have a life expectancy of 74, that is 20 years in retirement. Who is going to pay for that? It is the same old question, to which the answer is: either be born wealthy, inherit wealth, marry wealth or work to be wealthy.”
To survive and adapt, there is a need to prioritise and make difficult choices. This applies particularly to segments of the population who have multiple dependents to care for at the same time, such as their elderly parents and children. This group, better known as the sandwich generation, find that they have competing financial needs and priorities. They would need to adhere to the core financial planning principle of delayed gratification, says Rajen Devadason, a Securities Commission-licensed financial planner with Manulife Asset Management Services Bhd.
“They need to underspend to generate consistent cash flow surpluses to save and invest over the long haul to fund a potentially long retirement. The factors you have mentioned are competing for a share of finite resources stemming from active employment and business income,” he adds.
They will need to make difficult choices when it comes to what to do with their funds. “Hard choices need to be made, such as perhaps driving a smaller, older car for far longer than your friends deem appropriate, or purchasing a more modest home to live in than you can afford outright so as to have the ability to purchase nicer residential properties for others to occupy while paying you rent! This is one reason (there are, of course, many others) why I choose to live in Seremban and collect rent derived in Damansara Heights than to have it the other way around,” Devadason says.
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