A lack of savings and rising medical costs are only some of the challenges that Malaysians face when it comes to planning for their retirement years. These issues have been amplified by longer life expectancy, slower economic growth and a lower-for-longer interest rate environment, making it even more challenging to prepare for one’s golden years.

Michael Lai, executive director of wealth advisory, wealth management, at OCBC Bank (Malaysia) Berhad, talks about the issues and shares his views in the following Q&A.

The lengthened life expectancy due to advancements in healthcare innovation and technologies translates into higher medical costs. This subsequently leads to more frequent medical insurance repricing.

Additionally, when it comes to retirement planning, we used to only prepare for 15 to 20 years of retirement. Today, living beyond your nineties is getting more common. If you are planning to retire at 60, this means you have to plan for three decades.

According to the Department of Statistics Malaysia, males and females who reach the age of 60 are expected to live another 18.4 and 21.2 years respectively. The population of those aged 60 and above is also on the increase. Based on population estimates for 2020, this group of people has grown to 3.5 million, representing 10.7% of the population.

Given the uncertain outlook for the second half of the year, the current overnight policy rate (OPR) of 1.75% may not be a historic low for long. Malaysia is facing yet another wave of rising infection rates. Should the country adopt strict lockdown measures again, it is likely that a recovery may only be seen in mid-2021, and an economic recovery back to 2019 levels will be delayed to 2022.

Bank Negara Malaysia is expecting this year’s growth to be in the range of -3.5% to -5.5%, compared with -2% to 0.5% previously. There continues to be a good chance that the central bank will further cut the OPR by another 25 basis points to a new record low of 1.5%, owing to the uncertain global outlook for the second half of the year. Just like the US Federal Reserve, Bank Negara is not even thinking about raising interest rates, but will continue to provide support for the economy and see interest rates staying near zero until 2022.

Malaysians have never experienced such a low interest rate environment. We have always been spoilt with a risk-free interest rate of about 4% from FDs. Unlike our neighbours in Singapore, many Malaysians — myself included — had never seen interest rates fall below 2% before this year.

With the increased risk of pay cuts — or worse, job cuts — Malaysians need to bear in mind that there are now a lot more challenges to enjoying a comfortable and sustainable retirement. The Malaysian Employers Federation estimates that unemployment could reach up to two million this year — a staggering unemployment rate of 13%. This is significantly higher than Bank Negara’s expectation of a 4% unemployment rate, or 629,000 people.

It is not enough to make do with the Employees Provident Fund. Malaysians need to have a more focused mindset in terms of building their retirement savings to be able to be financially sustainable throughout their golden years.

In this lower-for-longer interest rate environment, diversifying into endowment plans using funds that are not needed over the next five years can be a good option. With endowment plans, the certainty of timing will ensure that you will have the required funds for your living expenses when the time comes.

Endowment plans aim to provide medium- to long-term potential returns through a combination of guaranteed annual payouts and non-guaranteed bonuses. There are many types of endowment plans in the market, which invest in different underlying funds.

Some Universal Life endowment plans, for example, invest mainly in fixed income assets and give guaranteed cash payouts yearly. This type of endowment plan comes with a periodic payment feature and may also give a monthly return, which helps to grow higher cash value due to the compounding interest effect.

In the spectrum of asset classes for retirees and pre-retirees, most would want to have a steady income while taking fewer risks with a long-term investment view. Having an anticipated stream of income from an investment-grade bond portfolio or dividend-yielding unit trust portfolio may help investors ride out the volatility that we are currently in.

Diversifying into an endowment plan can potentially generate higher returns than FDs over the longer term. It is a disciplined way of saving that can provide certainty of timing to ensure we consistently have income and cash flow to make our retirement funds last.

For pre-retirees, the 5- to 10-year period leading up to retirement is crucial. It is the period when their nest egg is most vulnerable to market downturns. Such short-term declines can affect their financial independence in the long run. Thus, investment assets may not be the most suitable over this critical period compared with an endowment plan.

A diversified portfolio can help weather uncertain periods such as the current landscape of ongoing Covid-19 pandemic risks. A lot of investors tend to limit their investment options, following the belief of investment veteran Warren Buffett, to only invest in what one knows.

Often, Malaysians tend to forget the context of this belief. We should not take it literally. Buffett lives in the US, we live in Malaysia. These are two very different markets — we do not enjoy the same variety of businesses or have the consumer buying power that they do. They have access to companies in various sectors that are much bigger in scale. In fact, even the companies that are focused on the US domestic market are many times bigger than our biggest companies.

Our market is very small. Do not limit yourself to only what you know because you live in a small Asian country. You need to have a global outlook because that will enable you to diversify properly.

One way investors can diversify easily is through unit trust funds. The unit trusts that are available in Malaysia today cover many markets, sectors, asset classes and currencies. This makes it easy for investors to gain different exposures and spread their risks, instead of betting on a single stock.

Another clear advantage of investing in unit trusts is that the fund managers are approved professionals whose decision-making is structured according to sound investment principles. This means investors are able to benefit from their depth of knowledge and experience.

The principle of retiring overseas is more or less the same as retiring locally. However, you will need to ensure that you include foreign currency investments in your portfolio, as you build your retirement nest egg for consumption when you retire in a foreign country of your choice. 

There are various foreign currency products out there. One such product is foreign currency unit trust funds, which may share similar objectives and investments as ringgit unit trust funds. Generally, foreign currency unit trusts are foreign currency-denominated funds that invest primarily in overseas markets. 

When it comes to proper retirement planning, one of the best practices is re-evaluating your savings and investments on an annual basis and identifying new avenues or opportunities for investments. Preparing for retirement is never easy, but there are ways to make it easier, such as leveraging on OCBC Life Goals.

OCBC Life Goals is a structured goal-planning approach that balances one’s needs and ambitions to provide comprehensive and customisable solutions. It helps customers to understand how much they will need and the current gaps in achieving their desired goals. Acknowledging that circumstances change over time, OCBC reaches out to its customers annually to review their plans and ensure that they are on track.

The aim of OCBC Life Goals is to educate our customers and provide them with the tools they can use to structure their thoughts and keep their eye on the ball. Many people would have similar life goals — they want to have a family, then prepare for their children’s education and finally, retirement. How they plan to achieve these, however, differs. Among other things, it would depend on their risk profile and personal circumstances.

OCBC Life Goals allow customers to clearly understand their risk profile as this will help them get to know the options most suitable for them. For example, after they determine that they are growth-oriented, they will be able to see the investment ideas that fall under this category that can help them achieve their goals. Through this process, they will know themselves better and be able to make informed decisions for themselves.

After this process is done, OCBC will provide customers with an illustration of what their returns would look like based on its historical data. It would take into account the investment amounts, time frame as well as inflation. This will help customers see if there is a gap or surplus in the amount needed to reach their goals.

This would act as a map and tool for them to keep track of their goals. Of course, goal planning is not a static thing — if their circumstances change, they can update the information. The calculator will then reflect the changes for 10 years down the road, for example.

One very important benefit to having a sound plan like the one customers can get from OCBC Life Goals is that it helps them to not lose focus, especially in the case of events such as market corrections. Sometimes, investors may be tempted to cut their losses or switch to something they perceive as a ‘better’ investment.

Having a life goals conversation with their relationship manager or investment adviser can help take away these concerns. After all, market corrections are temporary while their life goals may be 10 to 15 years down the road. They should be reminded that there is no reason to liquidate their investments as they are planning for the long term. Temporary corrections should not bother them so much. Once customers are given this context, they would think more rationally and not make any short-term decisions that may be detrimental.

Member of PIDM. Protection by PIDM is subject to insurability criteria. Please refer to the list of insured deposits displayed on OCBC’s website for further details.

The information in this article has not been reviewed by the Securities Commission Malaysia.