Retirement Trends in Malaysia are Concerning

When one thinks about retirement, one imagines that it would be a time of leisure after having worked for most of one's adult life. However, in Malaysia, data shows that this is not the case.

Prior to the Covid-19 pandemic, only about 22% of EPF members met the basic requirement for saving but the numbers fell to 14% after several rounds of special withdrawal schemes and facilities1. Furthermore, the average pension savings for 1.5 million EPF members in the age group of 45 to 49 stood only at RM115,8872, which is 51% below the threshold of RM240,000 for one to retire comfortably at 55 years old. And assuming if one is looking to have a “dignified” retirement in Kuala Lumpur, EPF Chief Strategy Officer Nurhisham Hussein also said that one needs to have an estimated RM600,000 in hand, which only about 4% of Malaysians could meet the threshold and afford to retire3.

Taking into consideration rising inflation and medical bills, one is encouraged to have multiple sources of retirement saving plans to achieve a comfortable post-retirement life. For example, retirement savings can be diversified into regular savings insurance, UT regular saving plan (RSP), bonds, private retirement scheme (PRS), et cetera. Table below illustrates the types of savings and investments owned by Malaysian older than 18 years old.

Source: FIMM 2021 Investor's Financial Literacy Survey. For illustration and information purpose only. This is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any investments or to adopt any investment strategy. Investment involves risks and investor should conduct their own assessment before investing and seek professional advice, where necessary.

Ways to plan for a comprehensive retirement planning

Retirement planning can be daunting. Let's look at some key points that can get you on the right track to planning a successful retirement.

1. To start, think of what your life would look like post retirement and list down your retirement goals.
2. Think about how much everything will cost, considering expected inflation in the decades ahead. Some things that you should factor into your calculations include housing costs, health-care costs, day-to-day living expenses, entertainment, and travel.
3. Next, add up all the income you expect to receive post retirement such as pension income, rental from investment properties, and stock dividends. Compare the revenue and expenses to see what needs to be set aside for every year of your retirement.
4. Some things that you can do to get started include: creating a budget, setting automatic transfers such as a regular saving plan into your retirement account, and creating an emergency account from your annual bonus.
5. You should also look into ways to diversify your portfolio - such as through investing in unit trusts, private retirement schemes, insurance savings plan, et cetera. The Milieu Insight survey conducted in June 2022 indicated that the most common investment types for Malaysians are investment funds (72%), which are managed by professional fund managers who take care of all the investment decisions. Other popular investment types include stocks (66%), gold (66%) and real estate (65%)4.
6. A need to comprehensively outline a sound retirement planning and to start it young. It is important to inculcate financial literacy and to start investing early.
7. Understand the availability of investment instruments such as deposits, bonds, equities, mixed asset, commodities, structured products, derivatives, private equity, private debt, et cetera.
8. After understanding the different investment instruments, one needs to strategize the desired asset allocation based on your own investor profile. Other risk-taking factors should include age & marital status and always remember to practice financial discipline to avoid excessive risk taking.
9. Investors should understand how different macro environment & backdrop will affect our investment returns.
10. If markets are volatile and losses set in, it is paramount to remain in a calm manner to make the most of market volatility - either to perform dollar cost averaging (“DCA”) or to realize the profit or loss upfront and wait for a better opportunity to reinvest.
11. Analyzing historical performance also can provide valuable insights how on a fund performs during periods of volatility and help investor to better strategize their own investment plan.
     

Mistakes to avoid during retirement planning

In addition, you can take control of your retirement planning by avoiding the below pitfalls:

1. Underestimating the cost of healthcare and wellness
   
   As healthcare inflation continues to outpace the rate of inflation, it is a huge expenditure to plan for on top of normal living expenses. When you retire and live longer, you will have increasing needs for healthcare and wellness, and these costs will be much higher than they are today.
   
   Recommendation: Ensure healthcare and wellness costs (especially out-of-pocket medical spending) and insurance premiums are factored into your budget and retirement plan. Don't take your health for granted and being healthy can save you a lot of money in the future, too.
    
2. Not diversifying savings & over-reliance on EPF savings
   
   54% of EPF members aged 54 and below have less than RM50,000 in their savings account, with a majority of those who withdrew their entire EPF savings upon reaching age 55 would exhaust it within two to three years5. Furthermore, should you not scale down your lifestyle by at least 20% of your usual monthly expenses after retirement, your pension savings would be exhausted at a much faster pace. Simply put - It's just not enough to only save with our compulsory pension contribution! Don't be fooled by our high national savings rate at the surface level, it turns negative once you take away the compulsory EPF contributions6.
   
   Recommendation: To maintain your standard of living post retirement (where you'll need at least two-thirds of your last drawn income), you need to complement your EPF contribution with additional personal savings & investment plan.
    
3. Not efficiently utilize your pre-mature withdrawals from EPF Account 2
   
   Early non-retirement withdrawals are allowed via your EPF Account 2 under specific circumstances to fund your housing, studies, or medical needs but you might lose out on the benefits of compounding interest that you have achieved over the years. Despite this, should you buy a house where its value appreciates at a faster pace or the studies that you undertake allows you to receive a higher salary in the future, you will be better off by not making an early withdrawal.
   
   Recommendation: Discipline is key and you need to decide on the opportunity cost of losing out on potential dividend gains and if the returns gained by utilizing your retirement fund outweigh the former. Withdrawing your retirement savings should only be the last resort if you run out of options.
    
4. Failure to review your retirement plan regularly
   
   When you first outline your retirement plan, you might have a premeditated plan to retire at a certain age. But what if you are forced to retire earlier due to ill health or you decide to work beyond your retirement age? Such a choice can have an immense impact on what and when you require from your portfolio. Hence, it is advisable to review your plan periodically to ensure it still aligns with your latest objectives. If you don't plan ahead, you might end up using your retirement funds to pay for life's unexpected costs.
   
   Recommendation: No one can guarantee that our best-laid plans will always yield the results we desire. However, by taking the right steps to review your plans at the right times, you can greatly improve your chances to boost your retirement adequacy.
    
5. Failure to understand investment challenges and financial implications
   
   While the shortfall in retirement savings could be attributable to the low financial literacy of Malaysians, failing to take a conservative investment approach at the right time could also potentially jeopardize your hard-earned life savings. Aggressive investment strategy, for instance, is more acceptable when you are young as you will have the luxury of time to recoup any losses you might have incurred. However, the table will turn when you inch closer to retirement as you need to withdraw the assets that you have accumulated in your retirement nest egg to pay for your expenses. Without a more prudent strategy that involves around capital preservation, a wrong move in investment strategy & adverse market volatility might erode your portfolio's value to a point that it may not be able to recover. Likewise, controlling your long-term debt is also key to reduce additional interest payments, which in return, can boost your savings & investments.
   
   Recommendation: Do not take on unnecessary risks and debt. To safeguard your investment interest, you need to constantly monitor the changes in market forces to be better informed and equipped to adapt to challenges during times of financial uncertainties. Always review your financial plans and if you need any financial advice, financial consultants are just a call away.

RHB Asset Management offers a wide range of conventional and Shariah-compliant investment strategies across geographical regions and asset classes. One method specifically for the purpose of retirement is RSP - a disciplined way of saving through regularly investing an equal amount of money into selected unit trust funds or unit trust funds under PRS regardless of the market fluctuations. Even during market uncertainties and volatilities, RSP benefits from the effect of “dollar cost averaging”, allowing one to build a stronger investment position and enjoy a lower average cost over time. When the market goes down, more units will be accumulated as the unit prices decline; on the other hand, when the market goes up, lesser units will be accumulated. In short, RSP can make investing in unit trust funds simple and fuss-free by allowing investors to set aside a small fixed amount (as low as RM100 monthly) to be invested in over 100 quality investment strategies without needing to commit to a large amount of capital upfront or risk investing a huge sum of cash during a time when you may not have the money readily available.

Benefits of employing RSP for retirement planning:

Below is a comparison table between insurance savings plan, property investment and regular savings plan (“RSP”):

 

To find out more, you may visit our website at:
https://rhbassetmanagement.rhbgroup.com/myinvest/client/

Terms and conditions apply. | For risk of investing @ Investment Disclaimer

RHB Asset Management Sdn Bhd (“RHBAM”) is one of the Private Retirement Scheme (“PRS”) Provider.

This document has been prepared by RHBAM and is solely for information only. It may not be copied, published, circulated, reproduced or distributed in whole or part to any person without the prior written consent of RHBAM. In preparing this document, RHBAM has relied upon and assumed the accuracy and completeness of all information available from public sources or which was otherwise reviewed by RHBAM. Accordingly, whilst RHBAM has taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, RHBAM cannot guarantee its accuracy or completeness and make no representation or warranty (whether expressed or implied) and accept no responsibility or liability for its accuracy or completeness. You should not act on the information contained in this document without first independently verifying its contents.

Any opinion, management forecast or estimate contained in this document is based on information available as the date of this document and reflects prevailing conditions and underlying PRS Provider's views as of the date of this document, all of which are subject to change at any time without notice. Such opinions, forecasts and estimates as well as the information contained herein relating to the historical performance of various indices is for information only and is not indicative of the future or likely performance of the PRS and should not be construed as such.

Investors are advised that investments are subject to investment risk and that there can be no guarantee that any investment objectives will be achieved. Investors should conduct their own assessment before investing and seek professional advice, where necessary and should not make an investment decision based solely on this document.
 

This document has not been reviewed by the Securities Commission Malaysia.

¹ https://www.thestar.com.my/news/nation/2022/09/23/rm1mil-needed-for-retirement

² https://www.theedgemarkets.com/article/state-nation-putting-oldage-security-within-reach-malaysians-without-public-pension-rm1-mil

³ https://www.thestar.com.my/news/nation/2022/09/23/rm1mil-needed-for-retirement

⁴ https://www.mili.eu/insights/fired-up-a-look-at-southeast-asians-pursuing-the-financial-independence-retire-early-fire-movement

⁵ https://www.thestar.com.my/news/nation/2021/10/31/epf-only-3-of-contributors-can-afford-their-retirement-says-chief-strategy-officer

⁶ https://www.theedgemarkets.com/article/longterm-challenges-retirement-planning