In this final article on retirement planning, the Financial Planning Association of Malaysia (FPAM) puts forward 21 recommendations to help Malaysians prepare for their future.
EDMOND Cheah, immediate past president of the FPAM says, “If we’re fortunate to live long enough, we all have to retire one day. So, make realistic decisions on the timing of your exit from the workforce.” Here are 21 steps to help you plan well for the golden years.
1. Face your future honestly
Extensive retirement studies show that those who exercise control over when they retire live happier lives than those who wait to be put out to pasture by others.
It is important to not make dangerous assumptions about the future. U Chen Hock, President of the FPAM observes, “Malaysians generally still harbour expectations of their children looking after them in retirement. However, I advise parents to be pragmatic in planning for their children’s education to the extent they can afford it without jeopardising their own retirement funding plan.” Of course, there is no harm in aiming to tilt the odds in your favour (see recommendation 18)!
2. Exercise delayed gratification
Financial planner Rajen Devadason says, “Those who adopt a delayed gratification mentality early in life often discover a decade down the road that this mindset is the most dependable key to future wealth.”
3. Start yesterday, failing which start today
The time value of money tells us money today is worth more than the same amount tomorrow. This is best understood by realising RM1,000 today will be worth RM1,030 one year from now if it is deposited in a 3% one-year fixed deposit (FD) account. This ability of money to snowball over time is termed compounding. Mike Lee, managing director of CTLA Financial Planners Sdn Bhd, says, “Compounding your savings and your returns early in life is always a better strategy than hoping to catch up later.”
4. Save your money
Two effective ways to save money are to first set aside savings before allowing any other outflows each time you receive your salary, and second, to manage your cash flow effectively.
Even those who have let time slip by can benefit from saving money. Wong Loke Lim, honorary secretary of the FPAM, explains: “While it’s obviously better to start saving early, it is never too late to start even if you’re already close to retirement. This is because every ringgit saved will help cover retirement expenses.”
5. Teach yourself about financial planning
Take personal responsibility for educating yourself about financial planning. The bookstores are filled with awesome resources. Cheah says, “It is vital that those who are serious about succeeding in retirement begin thinking and reading about it as early as possible.”
6. Write down your goals
Retirement specialist Devadason says, “Over many years of consulting, I’ve discovered that my most successful clients have goals that are clearly written in personal, positive and present tense terms.” It is therefore wise to write down your own retirement planning goals in the same way.
7.Fine-tune your preferred future on paper
The earlier you begin writing down your dreams for the perfect retirement, the more time you will have to tweak those aspirations into concrete written goals. It is important that personal control is exercised in this matter. FPAM honorary secretary Wong says: “Loneliness, loss of respect, expensive medical bills – these are just some possible negative aspects of retirement which must be taken care of.”
As for the financial dimension, Cheah elaborates, Be practical; know that you will have to compromise and adapt to possible changes to your lifestyle.”
8. Beef up your net worth
Your net worth is measured by your net worth statement. This lists all your assets and all your liabilities. If you total each column, the difference between assets and liabilities is your net worth. In corporate terms this is equivalent to a company’s net book value. We should focus on boosting our store of productive assets that generate passive income for us in the form of dividends, rental and interest. At the same time, we should eliminate all forms of bad debt that suck up our financial resources.
9. Create your own pension
Some government servants can look forward to a lifetime public sector pension that’s equal to half of their final drawn salary. Others contribute to EPF, just as most private sector workers do. K.P Bose Dasan, Securities Commission-licensed financial planner with Standard Financial Planner Sdn Bhd, maintains, “Retirees must have a pension. No pension, no retirement!” So, those without a government pension must take personal responsibility for creating their own. Devadason says, “The goal for everyone should be to proactively create multiple sources of income from investments and, perhaps, privately-held businesses to channel through a future pipeline of passive income.”
10. Purchase appropriate life insurance
Ultimately, people should aim to be self-insured. But the road toward such a large level of wealth is not easy. Along the way, those who are gradually building their net worth (see recommendation 8) ought to ensure they’re managing disability and premature mortality risk appropriately. Michael Tan Lib Chau, CEO of RHB Unit Trust Management, says: “Besides setting aside some savings for investment, it is also crucial to protect the loss of earning capacity. In other words I would encourage them to seriously look at life insurance coverage.” Toward that end, many financial planners believe a “buy term and invest the difference” approach is the most cost-effective route.
However, the danger lies in a possible lack of discipline being exhibited by some adherents of D-I-Y financial planning: They might choose to buy relatively cheap term life policies but then squander the rest of the money. In many cases, then, it would be wise to work with a reputable financial planner
11. Prepare for future inflation
A major factor in retirement funding calculations is future inflation. Saving money in the bank, while a great initial step toward financial freedom, is unlikely to generate returns greater than inflation. Therefore, focus on educating yourself on the damaging effects of inflation and the need to accept some level of investment risk.
12. Manage your investment risk
It is unwise to take on so much investment risk that you lose sleep and begin to develop ulcers. On the other hand, accepting too little investment risk is likely to hurt your long-term portfolio returns. Educate yourself to gradually elevate your risk appetite to at least moderate levels. Tan Beng Wah, CEO of CIMB Wealth Advisors Bhd, explains why the quanta of accepted risk should change with age: “In funding for retirement, the investor may start with an aggressive portfolio, then switch to a moderate one half way toward retirement, and then to a conservative portfolio when he or she is a few years from retirement.”
Knowing how to do this wisely requires either active self-education or the help of a trusted advisor or, preferably, both.
13. Enslave your money
Don’t always work for your money. Make it work for you. Steve L. H. Teoh, deputy president of the FPAM, notes, “Failing to plan is planning to fail!” This piece of advice is relevant to those entering retirement. Teoh explains, “From that point on, the wealth a person has accumulated throughout his working life will now have to work for him instead.” The larger that pool of resources and the harder it works for the retiree, the better the quality of life in retirement.
14. Hone your career skills
Do what you can today to extend your employability through enhanced skills development.
15. Target greater tax efficiency
Bose, a tax specialist, notes, “To retire well, you have to accumulate a healthy sum in your retirement portfolio. It helps, therefore, to take advantage of all possible tax incentives available in Malaysia.” A tax specialist in retirement planning can be of great value in this endeavour.
16. Tame the credit beast
Unnecessary interest spent on consumer debt instruments, particularly credit cards, sucks money away from possible retirement plans. Manage your total liability situation well.
17. Aim to be debt-free
While there is such a thing as good debt that ends up enriching us, most people are wired in such a way as to benefit from living a debt-free life. Therefore, if the prospect of one day becoming free of all liabilities appeals to you, make it a written goal and then act in a manner consistent with that desire. Teoh says, “Work toward attaining zero gearing in as short a period as is practical. Certainly settle all credit card monthly dues promptly and in full! Remember, there is always a cost to borrowing.” He recommends settling all liabilities by age of 50, or earlier.
18. Train your children well
In the decades ahead, it will be difficult for even the most filial of children to fully fund their parents’ retirement needs. But if you are able to instil even a partial sense of responsibility in your children as they mature, you might be able to derive a steady, modest flow of income from them. This possibility should not in any way alleviate your own responsibility for funding your own retirement through intelligent saving and investing.
19. Clarify your legacy
Write a will. Consult a reputable will writer or a lawyer familiar with probate matters. Ong Eu Jin, chief operating officer and director of OSK Trustees, and author of Can Wealth Last Three Generations, says: “It is important to have a will. Also, parents with minor children should consider creating a testamentary trust under their will.” Such a trust may be used to set aside specified liquid assets like bank deposits, unit trust funds and life insurance proceeds to meet children’s maintenance and education requirements in the event of an untimely demise by one or both parents.”
20. Make a difference
Aim to retire from work, not from life! Always focus on continuing to live a life of significance. This requires careful long range planning.
21. Engage the right financial planner
Sue Yong, executive director of Equity Trust (Malaysia) Bhd, notes, “To enhance your chances of succeeding in retirement, focus on building a good working relationship with a financial planner for the long-term. Such a professional may also act as a coach when we have gone astray from the agreed plan.” Financial planner Ken Lo of Money Concepts Corporation adds, “Because most people have little time, discipline, knowledge or expertise to manage their own financial affairs, they need to work with professionals to reach their financial goals.”
The first step in becoming adept at financial planning is focusing on self-education. That commitment alone will help most people enormously. For those who might want to pursue things further, please visit FPAM’s website at www.fpam.org.my for a free downloadable copy of “Insights to Choosing A Financial Planner” as well as to search and access the directory listing for licensed and qualified financial planners.