Many of us are motivated to work hard so that we can enjoy a certain lifestyle today. However, we rarely think about what our lives will be like when we are older. If you want to be independent and able to afford the best things in life, you need a retirement plan.
According to a study by the Asian Strategy & Leadership Institute, most households in Malaysia have zero savings. Almost 90% of working Malaysians earn less than RM5,000 a month, and only half of them are active contributors to the Employees Provident Fund (EPF). About 80% of the workforce will not have enough money at retirement to sustain themselves.
The key to success is getting your retirement plan right. Here are 6 retirement pitfalls to avoid.
1. Not having a goal or a plan
Taking a passive stance on your retirement and underestimating your financial needs is a huge gamble. It is estimated that many Malaysians go through their EPF savings within 5 years. What will you do when you run out of funds?
You must also bear in mind that the goal after retirement is to enjoy the same standards of living as your working years, or better. Not having a plan will see you running into financial difficulties and possibly placing a heavy burden on your family members.
There are also factors such as inflation and the rising cost of goods and healthcare to consider, which will increase your living expenses. Having a proper plan will help you achieve a worry-free retirement.
2. Not diversifying your savings
This is a prime mistake. Many people rely only on their EPF, but it should not be your sole source of retirement funds. Despite growing at a rate of about 6% per annum, there are other options with similar or better returns to consider.
A good example would be Private Retirement Schemes or other savings plans, unit trusts, real estate, high-interest fixed deposit accounts or other means of generating long-term, consistent and competitive returns at a low risk.
3. Withdrawing from your EPF account 2
While your Account 1 is strictly off limits till retirement age, EPF has made it possible for you to make withdrawals from your Account 2 under specific circumstances. You can make withdrawals for the down payment on a home, to repay a mortgage, for further education or unexpected medical bills.
However, unless you are in a bind, and are disciplined enough to replenish the funds when you’re back on your feet, it may be wiser to leave that money in the account, especially if the funds aren’t being used for a growing investment.
Instead, look into growing your EPF funds further. The EPF allows members to withdraw up to 20% from their Account 1 for investment in EPF-approved unit trusts after the Basic Savings* in Account 1 has been set aside. To find out more see http://www.kwsp.gov.my/portal/en/member/online-services.
4. Starting the savings process too late
Why wait till you’re 55 when you can perhaps retire at 35 to pursue your passion projects? The sooner you start saving, the earlier you could retire.
Starting the savings process early has its benefits by two magical words: compound interest. What is compound interest? It's interest that earns interest.
If you save RM10,000 and your bank gives you 3% per year in interest, you will have RM10,300 at the end of the year.
The next year, you will begin to earn interest on RM10,300, and at the end of that year, you will have RM10,609.
Now, imagine you add RM1,000 every month into the same account. At the end of 10 years, you would have amassed RM153,235. Without compound interest, you would only have RM130,000. This means that you earned RM23,235 just from compound interest.
It’s advisable to start saving in your 20s, so that you have more time to let compound interest do its work. Saving your money in the bank is not the only way you can let compound interest work for you. You can look at other investments such as unit trusts that may give you a higher interest rate. There are fun online tools that can help you plan your savings and investments such as Calculator.com.my or speak to a trusted adviser.
5. Spending your bonuses immediately or allowing debt to pile up
Many people believe that since they are contributing to EPF, have bought a house, or have some monthly savings, that they are safe to spend their annual bonuses.
Instead of spending your bonuses immediately, look at how you can use it to get rid of debt (study loans, credit cards, car or home loans) or grow your savings/investment pool. It’s important to note that compounding interest on credit cards and loans could also snowball your debt.
This may not be as fun as splurging, but so that you don’t remove all the joy from your working life, look at having different savings buckets. After your bills, payments and emergency cash funds have been looked after, see how much you have left over from your bonus and allocate different amounts to a travel bucket, or a new mobile phone bucket, or other purchases you may wish to make, not forgetting your savings or investments. This way, you can still experience rewards before you retire.
6. Not accounting for health costs
Health costs are on the rise. According to PwC’s Health Research Institute, medical cost trends in 2017 will experience a 6.5% growth rate.
Many Malaysians take their health for granted and don’t have back-up plans for illness. By the time you retire, medical costs will be far higher than they are today, and you will have increasing needs for healthcare as you grow older.
It’s important to consider a medical protection plan to cover hospital, outpatient and other healthcare needs. Beyond that, you must take note that after 65 years of age, if you have a known medical condition, or have made previous insurance claims, you may not be able to renew your policy. So, it’s important to ensure that your retirement plan includes funds for situations like this.
Speak to someone you trust or explore your options for health coverage. You can also find out more about medical insurance here.
*Basic Savings is a fixed portion of the total amount a member has in their EPF Account 1 which is untouchable. This amount increases at different age levels and serves to enable EPF members to accumulate a minimum savings of RM120,000 at age 55. It is compulsory for EPF members to retain the Basic Savings portion in their EPF Account but they can withdraw up to 20% of their total amount for investment in unit trusts, after the Basic Savings has been deducted.