Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Dec 21 - 27, 2015.

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Your golden years may be far away, but the time to begin strategising is now. Needs are evolving at a quicker pace and ideally, the methods to protect your nest egg should also change with time. How you plan and invest for wealth protection hinges on how emotionally, physically and mentally fit you are, especially with rising life expectancy. Maintaining a good social circle and learning new skills will not only help you stay intellectually stimulated but also age happily and healthily.

 

Does the 20/80 approach still hold? 

A person should have saved enough money for his retirement by the time he stops working. But increasingly, this has become harder to achieve, owing to factors such as low interest rates and higher cost of living.

For many individuals, their savings in the Employees Provident Fund (EPF) are not sufficient for their retirement years. In March, EPF CEO Datuk Shahril Ridza Ridzuan said nearly 80% of contributors who turn 55 this year would not have enough EPF savings to enable them to live on RM800 a month for the rest of their lives.

The Allianz International Pension Papers 2015 ranks Malaysia No 47 out of 49 countries based on its Retirement Income Adequacy Indicator (RIA), which ranks countries according to their potential to provide retirees an adequate retirement income.

In the light of this, should a retiree still follow the 20/80 approach post-retirement? StanChart’s Chang says this is a model adopted by insurance companies and pension funds around the world, but it is not a rule of thumb. Ultimately, it depends on the assets and needs of an individual.

The industry landscape is currently shifting to a 30/70 approach. “Because of the low interest rate environment, it is now moving towards 30/70. You have to take 30% risk because interest rates for fixed-income instruments are lower than previously,” he says.

Building a dividend portfolio

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When investing in stocks, EquitiesTracker.com’s Vong says that according to its algorithm, dividend-paying counters with a long track record would be a good place to start. Look at the company’s net profit, gross dividend and dividend payout ratio, and cash flow for the past 10 years, he adds. 

“Based on our data, there are 114 stocks that fit these criteria. We could structure a dividend portfolio that can generate a steady stream of income. These are companies with strong fundamentals. We call them investment-grade stocks. They are safe with low volatility and are able to pay out dividends even during times of recession, such as the 2008 global financial crisis,” says Vong.

According to the company’s algorithm, it is possible for a retiree to invest RM242,500 (based on 2015 data) in 20 dividend stocks with solid performance and receive RM13,473 annually, which works out to about RM1,122 a month. These dividend stocks include British American Tobacco (M) Bhd, Amway Holdings Bhd, Axis Real Estate Investment Trust and Hai-O Enterprise Bhd. 

“The historical data of the companies are extremely important. It is not a guessing game, but based on proven track records,” he points out.

Vong stresses that an investment portfolio has to be constructed based on a person’s risk profile and be constantly monitored.

Rajen Devadason, a Securities Commission Malaysia-licensed financial planner with Manulife Asset Management Services, says this is a good idea for retirees to look into. “I don’t believe it is safe to rely entirely on dividend-yielding equities at the expense of risk-off options, such as money market and bond funds and bank deposits, but I do like having a significant portion of a client’s retirement passive income coming from dividends derived directly from relatively safe dividend-yielding stocks and indirectly from even safer dividend funds.”

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StanChart’s Chang agrees that a retiree could look into building a dividend portfolio to generate higher income. But it should not be a case of “picking five stocks and holding on to them”, he says.

“To an extent, there is some truth to that. Because of its cash generative ability and low beta, it means lower volatility compared with the market. But it doesn’t mean stock prices won’t fall.

“Let’s say if you pick five dividend stocks and hold on to them, it may not work because businesses go through cycles. Regulations can change. Tobacco companies can pay very good dividends but when the duty goes up and sales come down, the companies are impacted. Regulations and demographics can change the payout structure of the company. The value of having [investment] advice is still there.”

Pramod is more cautious. StanChart classifies retirees as the “vulnerable segment” as they no longer generate income from work. This excludes those who are sophisticated investors and have an investable surplus in excess of RM3 million when they retire.

“For normal clients, we tend to say, ‘If you have a risk appetite of three, you can go up to five’. But we would not sell any solution that goes beyond a retiree’s risk appetite. If a 70-year-old retiree comes to us and wants to invest in sectors deemed risky based on his risk profile, we advise him and say, ‘Sorry, we will not offer such high-risk solutions to you,’” he says.

The bank uses an investment profiling questionnaire to evaluate a prospective client’s risk profile. Then, it uses an algorithm to derive his risk appetite, with a grade of one to six.

Although the 80/20 approach puts more weight on equities, fixed-income instruments remain relevant, says Chang. The stability of such instruments cannot be replaced by equities despite giving a lower return in recent years.

“This is because as you age, you should be getting closer to your financial goals and have a clearer cash flow certainty after retirement. The certainty offered by bonds is harder to get from equities,” he says.

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