Retirement Planning: Perception of retirement must be changed

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on November 27, 2017 - December 03, 2017.
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Malaysians must alter their mindset of what retirement is and view it as a chapter instead of an end point so that they can plan better for what is to come.

According to Kenanga Investors Bhd CEO Ismitz Matthew De Alwis, most people go through their working years thinking of retirement as the final destination. This perception is one of the main reasons many people fail to plan and sustain their life savings in their retirement years, he said at The Edge-Kenanga Retirement Forum 2017.

“But the truth is, retirement is another phase of life. If you really observe, every phase of life — from childhood to young adulthood, to starting a family — lasts an average of 25 years. So why should retirement be any different?” said De Alwis.

Planning well is even more pertinent today with life expectancy rates increasing and birth rates dropping. Malaysia also faces the prospect of a growing ageing population and workforce, De Alwis told participants during his presentation on why retirement was going to be more challenging than before.

“Just look at our neighbours across the Causeway. People in their sixties and seventies are working at fast-food joints as cleaners and servers. Why do they need to continue working at an age when they should be putting up their feet and relaxing?” he said.

“A friend recently argued that Singapore is rich enough to provide the elderly with a social safety net similar to some Scandinavian countries. But what many people fail to grasp is that in those countries, their citizens are taxed more than 50% [so that aged care services, for example, can be rolled out]. Can such a high tax regime be imposed in Singapore, or even Malaysia for that matter?”

According to the Department of Statistics, Malaysia is expected to experience population ageing by 2020, where the percentage of those aged 65 years and above reaches 7.2%. “There is new research that says if you live beyond 72, you are most probably going to live past 80. That is 20-odd years of life after retirement. So, like every other phase in life, retirement is simply a milestone on this journey,” said De Alwis.

In February, the Employees Provident Fund (EPF) disclosed that two-thirds of its members aged 54 had RM50,000 or less in their accounts as at 2015. This data is one of the reasons the EPF is considered to be “one of the least adequate” in the Allianz Retirement Income Adequacy Indicator — a ranking of retirement income adequacy of pensions provided by 49 countries across the globe. Going by this data, at the official retirement age of 60, most Malaysians may find themselves with no assets and roughly 20 more years to live.

Despite numerous research and statistics that set alarm bells ringing, most Malaysians are not prepared to retire, taking into consideration the rising cost of healthcare, increasing inflation and longevity risks. “By 2040, 19.8% of the population will be made up of senior citizens. Besides living longer, we have to worry about inflation. Our headline inflation is at 3.6%, but there are categories of inflation, such as education and healthcare expenses, to consider,” said De Alwis.

“Gone are the days when people had children early in life. My children will only be in college when I am in my late fifties and early sixties. So, by the time we retire, our children will still be in school.

“We will not only have to pay for their education but also provide [financial] help after they graduate and start working. For instance, they will need a car or help with the down payment for a property of their own.

“If your parents are dependent on you, that is another thing to think about. It is a sandwich environment because we not only have to care for our children but also our elderly parents. So, if you are going to put your money in fixed deposits, it will be another challenge as interest rates are rather low. That is why we need to look for investments that offer returns beyond the inflation rate.”

Given the circumstances, it is pertinent for those just starting work or in their mid-career journey to think about their goals and responsibilities and start saving accordingly, said De Alwis. “How much do you need to save? According to the Organisation for Economic Cooperation and Development, on average, one should save at least 33% of their income while working. And by the time they reach retirement, Malaysians should look at building a nest egg that is 12 to 14 times larger than their last drawn annual salary.”

The Private Retirement Scheme (PRS) is another savings option to consider, said De Alwis. The scheme offers a maximum tax relief of RM3,000 to contributors.

Under Budget 2017, RM165 million was allocated to the PRS Youth Scheme (for those aged 20 to 30), where the government will give a one-off RM1,000 incentive for a minimum contribution of RM1,000 in PRS accounts. The incentive was previously RM500.


The coming third age crisis

It is becoming more difficult today to have adequate funds for retirement with the growing number of risks and challenges. But with a carefully planned strategy, it is possible for individuals to accumulate enough wealth to enjoy this phase of life. This was the central theme at The Edge-Kenanga Retirement Forum 2017, which was held last Saturday.

In his welcome speech, The Edge editor-in-chief Azam Aris said individuals are facing unprecedented challenges in planning for their retirement. Yet, many are unprepared for it.

“The third age crisis is coming. Factors like the prolonged period of low growth and low returns, rising healthcare costs, increasing inflation and longevity risk have created a new reality for individuals,” he said.

“For many of us, this means having to rethink and re-evaluate our strategies to ensure that we do not outlive our savings. This needs to be done as early as possible.”

Four speakers addressed various aspects of retirement planning. Kenanga Investors Bhd CEO Ismitz Matthew De Alwis gave an overview of why retirement will be more challenging than before. Farah Deba Mohamed Sofian, chair of the Society of Trust and Estate Practitioners (STEP) Malaysia, spoke about the mistakes individuals should avoid making when it comes to estate planning.

Aged Care Group Sdn Bhd CEO Dr Carol Yip talked about the long-term care landscape in Malaysia and the options available for individuals. Chan Ken Yew, head of research at Kenanga Investment Bank Bhd, wrapped up the forum by offering an outlook for the local market next year and some strategies that investors can adopt.

The forum was organised by The Edge in partnership with Kenanga Investors Bhd and KL Eco City.