Plan Well

PLAN WELL

4 Important Questions in Retirement Planning

12 October 2018

4 mins read

Retirement planning is rarely the top-of-mind topic for many people (except perhaps for financial planners). We often go on an autopilot/cruise mode through adulthood, taking things on as they come - whether it’s buying a house, raising a child or deciding or the next holiday. However, with the rising cost of living and a longer lifespan for Malaysians, coupled with increasing inflation, planning for our retirement years is more crucial than ever.

For a safe and comfortable retirement, it’s important to ask yourself the ultimate question: How much is enough, and what must I do to get that amount?

Needless to say, each individual’s retirement needs and funds differ based on their current expenses and desired lifestyle. Here are 4 questions that will help you calculate your retirement fund needs.

“How much will I need at retirement?”

There are a few costs and expenses to consider, when you decide on the amount of money you need in your retirement fund.

Put a number to your monthly expenses. Determine how much you need every month to live comfortably. Consider that the cost of living may be significantly higher when you retire in the future, considering the rate of inflation. For example, if your monthly expenditure is RM3,000 today, that same amount would be higher at your retirement. The current inflation rate is expected to be around 3.1% in 2020.
Multiply with the cost of longevity. When will you retire and how many years can you survive without an income? For Malaysians, we are lucky to have seen the life expectancy increase over the years (the average life expectancy of Malaysians is at 74.88 years today). Multiply your expected monthly expenses to the number of months of maximum life expectancy to determine the amount you need in the long-term.
Factor in health needs. With age comes risk of certain health conditions, which may need hospitalisation or intensive medical care. Consider how you will be managing healthcare costs after retirement. Will you continue to have a medical insurance plan? Otherwise, how much should you set aside for healthcare costs?
Family & dependents. During retirement, will you have family members or dependents that will still rely on you financially? How much money do you need to allocate for this?
Consider your dreams. You’re at the start of your golden years and you may feel like you finally have the time to enjoy your hobbies or travel. What is one thing you have always wanted to do after retiring? Go on a cruise, learning a new skill or remodelling your home? If your retirement plans involve some cost, be sure to allocate this as well into your funds.

“How much do I need to save (or invest) to get to my total retirement fund?”

Now that you have a rough idea of the amount you need for a comfortable retirement, it’s time to figure out how you can get there. The most straightforward method is to figure out how much you can save from now until the time you retire.

Let’s say you need to save an additional RM500,000 in the next 25 years of your remaining working life. That would mean a contribution of RM1,667 per month, for the next 25 years, so that you can accumulate that RM500,000 for your retirement.
Are you able to put aside that amount? If not, what can you do to fortify your finances? Consider job and career advancements down the road as well, which will help to increase the amount you are able to save.

“What if I’m starting my savings too late?”

The best time to save was yesterday. The second best time is today.”

If you have a considerably shorter time to save for your retirement, look at ways to accelerate your savings.

Don’t let the fear of time get you. Even if you only have 10 years to go to retirement and you plan to begin saving now, some of the compounding interest can show its return in the long run (if you continue investing).
Leverage on your experience, and research on short-term retirement plans that you can invest in. A-EnrichGold, for example, is a 10-year short-pay plan that not only provides guaranteed cash payment and maturity value, but also 25 years of life protection.
It also helps to eliminate as much debt as possible before you go into retirement, especially high-interest credit card debt. You don’t want to be saddled with debt at a time when you should be enjoying your twilight years.

“I am self-employed. How can I plan for my retirement?”

As the freelance/gig economy takes flight, employer contribution to EPF may be less of a norm. If you are not able to contribute to your EPF consistently, look into government schemes and private retirement solutions that help with this.

The 1Malaysia Retirement Savings Scheme with the EPF aims to encourage the self-employed who do not have a regular income to contribute to the savings scheme. It is ideal for people who are freelancers, online business owners and even housewives.
Private Retirement Schemes (or PRS) offered by financial institutions are a popular choice for retirement fund building. It’s also a great choice for people who are already contributing to their EPF, to beef up their retirement fund. Here’s an infographic explaining PRS vs. EPF.

No matter your current financial situation, or how many years you have left to work, now is the best time to start planning for your retirement. You not only get a head start from starting early, but you also reap the returns of compounding interest over the years.

References

http://www.tradingeconomics.com/malaysia/inflation-cpi/forecast

http://data.worldbank.org/indicator/SP.DYN.LE00.IN

https://www.forbes.com/pictures/emdk45edlme/retirement-planning-for-late-starters-7/#4209435c7568

https://www.nst.com.my/news/2017/04/228008/73-msians-die-hypertension...

https://www.imoney.my/articles/retirement-plans-for-the-self-employed

http://www.kwsp.gov.my/portal/en/general/1malaysia-retirement-savings-scheme

The above articles are intended for informational purposes only. AIA accepts no responsibility for loss which may arise from reliance on information contained in the articles.