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Personal Investment – A column by Ooi Kok Hwa-The Star

SOME studies conducted in Malaysia have shown that most retirees spend all their EPF money within three years of their retirement. Given that the average lifespan for a Malaysian is 75 years, if we retire at 55 and spend all our EPF money within three years, a lot of us will be wondering how to survive from 58 to 75.

The most worrying question that most of us will be asking is how to survive retirement when we lose our steady stream of monthly income to cover our daily expenses.

However, if we have been building an investment portfolio apart from EPF money, we would not be able to generate a source of returns from our own investment portfolio.

In reality, a lot of us have been spending most of our savings, including part of our EPF savings on our children’s education and clearing debts on house and car purchases, which leave us with not much savings for our retirement.

With this general concern in mind, let’s look into how much of our EPF money we can afford to spend to have enough for our retirement based on the our local conditions and some assumptions.

Generally, an average Malaysian starts working at 25 and reaches retirement at 55 (after 30 years of working), thereafter living the remaining 20 years (until 75) relying on the EPF savings.

We will assume a starting pay of RM1,500, growing at the rate of 8% per annum; an average bonus of two months per annum, average EPF returns of 5%, total EPF contribution of 23% (employer: 12%, employee: 11%) and inflation rate of 3%.

Our main objective is to test how much EPF money we can spend until we use it all up.

Our analysis shows that if we are able to live with just one-third (or 33%) of our last drawn salary, the EPF money should be able to support us for 20 years until we pass away at 75.

From the example below, if a person’s last drawn salary is RM13,976 at 55, he can only afford to spend one-third or RM4,612 per month after retirement (1/3 x RM13,976).

However, if his spending exceeds the one-third level, such as 50% or the full amount of his last drawn salary, his EPF money can only last 12 or five years respectively.

Even though our computations are based on a lot of assumptions and hypothetical scenarios, our objective is to bring to your attention that we need to be careful in spending our EPF money and control our expenses once we retire.

We will need to adjust our lifestyle after our retirement, especially for those of us that are used to spending most of our take-home pay when we are still working.

Once we lose the regular income source and are relying just on the savings, we will need to plan carefully in order not to out-live our savings. In this example, we can only afford to spend 33% of our last salary after retirement!

Everyone has different financial situations. However, we need to plan for our retirement. If possible, we need to build our own investment portfolio apart from the EPF savings. We may need to seek some part-time jobs after retirement if our financial resources do not permit us to stop working. Besides, we need to clear all our outstanding debts before retirement.

We also need to buy enough life and medical insurance for ourselves as well as set up education funds for our children.

Last but not least, one important point to note is that our computation is based on the assumption that we are still able to generate 5% returns after retirement.

Unless we have the skills and knowledge to generate the returns, putting the money back in EPF and letting EPF generate returns may be a good option. For the average person, we feel that it is not easy to generate 5% returns annually over a long period of time.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
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CAROL YIP gives her best comment about living after age of 55. Let’s read it!

HOW to stretch your ringgit when you hit 55? Continue to work is the answer. The current financial crisis is a clear message that we need to work longer to ensure that we have money to live through retirement if we cannot depend on investments for financial security.

Imagine if we face a similar crisis when some of us are in our 50s, 60s or 70s? What will happen to our retirement money?

Even if our investments are not affected by the crisis, it can still be financially challenging for some to live through old age, especially in this world of consumerism and rising cost of living, coupled with the smaller family nucleus, having kids at older age, broken families, divorces, being a widow and single parenthood.

There will come a time when retirees need to work again, not for passion but for the money. Therefore, the ability to work and the opportunity to be employed beyond 55 are necessary. This is evident in Singapore and Japan.

Singapore will put in place a new law in 2012 that requires firms to rehire workers beyond the retirement age of 62.

Japan’s pensionable age is being lifted gradually from 60 to 65 because Japanese workers are finding it increasingly necessary to continue working after retirement to help defray the rising cost of living as well as to cope with shrinking pensions.

The gradual revision started in 2001 and is due to be completed in 2013. Under the law, employers can choose from three ways to extend the employment of workers.

The most popular option is to keep the retirement age at 60 and re-employ workers after they retire, as this entails minimal changes to hiring policies. Some companies prefer the second option of raising the retirement age to match the pensionable age.

McDonald’s Japan is one of the few companies that have adopted the third option – eliminating the retirement age altogether. The country’s largest hamburger chain even has workers in their 70s and early 80s at its outlets.

In Malaysia, many have to retire at 55. Some choose to retire early, with the hope of enjoying life or finding better financial prospects with other jobs or through businesses. There are cases of retirees failing to make money doing business and ending up using up large portions of their retirement funds to sustain their businesses.

Unless a person is equipped with entrepreneurial skills, abilities, networking, knowledge and experience to do something that can make money, his safest option is to continue to be employed.

However, even if we want to continue working after 55, there is the employability issue. Most companies are not keen to employ people who are approaching their 50s unless they have special skills, valuable knowledge and experience, reputation, recognition or good connections. People who lack the suitable criteria will disappear from the employment radar.

It does look like a chicken-and-egg situation. Do we need to first urge employers to extend the employment age beyond 55 or should employees first demonstrate keenness to continue working past 55?

Unless we have the means to continue growing our money, we may not be able to see the silver lining beyond those grey clouds.

For a better tomorrow, we should seriously look into employment after 55. Employers need to consider extending the employment age to at least 65.

We should also have headhunters and employment portals for people in their mid-40s and above, making it easy to match employees and employers in this target market.

Living through middle age and into retirement can be challenging. At work, we either experience being productive or we are in stagnation. Therefore, it is good for human resources personnel to conduct training-needs analyses for employees aged 40 and above so as to identify programmes to upgrade skills, promote motivation and instill confidence.

I would also suggest health education programmes on the ageing process and active living for the employees to prepare for transition to their “Third Age”. This is because hormonal changes (menopause for women and andropause for men) can affect employees’ moods, emotions, self-esteem and motivation at work.

Last but not forgotten, financial programmes on personal money management, financial products and how to invest money wisely are important soft skills training. After all, money is a reason for working.

Personal Investing – By Ooi Kok Hwa

Wealth for retirement, How to earn 30-year investment returns with different savings amounts and rates

ON Jan 28, we have written an article on We all need to become millionaires. That article explained that we need to have cash reserves of about RM1mil to be able to maintain our current lifestyle 20 years after retirement.

Some readers responded and would like to know more on how to accumulate enough money for their retirement.

In this article, we will look into 30-year investment returns with different savings amounts and rate of returns. Our computation is based on the assumption that we start investing at the age of 25 and intend to retire at 55.

·Based on how much rate of returns you can achieve

The table shows that if we save RM100 per month and invest the money into fixed deposits (FD), assuming the FD can provide about 3% return over the next 30 years, our investment portfolio will reach RM58,274 when we reach 55.

However, if we can generate 5%, 7% and 10% returns, our investment portfolio will achieve RM83,226, RM121,997 and RM226,049 respectively.

The EPF may be able to provide us about 5% whereas unit trust investments may be able to give us 7% to 10% returns over a very long-term period.

Assuming that we treat the 3% FD return as our risk-free rate, any extra returns above this rate will be the risk premium for the additional risk that we are prepared to face.

Therefore, we need to understand our risk tolerance level before considering any type of risky investment.

We should ask ourselves whether we are willing to accept the uncertainty of return that is inherent in those investments.

Besides, we need to understand whether we can afford to have our savings tied up for a long period before we can achieve our investment targets.

·Based on how much you save and not how much you earn

We agree that when you earn more money, you should have more money for your investments. Unfortunately, some investors are unable to save even though they earn high salaries.

From the table, we can see that if we are able to save RM500 per month in FD, assuming a 3% return per annum, our investment portfolio will reach RM291,368 when we retire at age 55, five times higher than the savings of RM100 per month.

Hence, if we can cut down on our expenses and live below our means, we should have more money to save.

We should always ask ourselves whether we want to spend money on unnecessary luxury items to keep up with the Jones or be more frugal and spend less to achieve financial freedom earlier.

The question on how to generate high returns is frequently asked by readers. Unfortunately, there is no straight-forward answer to this.

We can equip ourselves with strong financial and investing knowledge which helps us in making better investment decision that will eventually translate into better returns.

Only 34% of Malaysians putting aside money regularly for retirement funds

YOUNG parents Xavier Arumugam and Kavitha Nair has been putting aside a fixed sum every month into their savings accounts as part of their retirement nest egg after deducting expenses for the household, medical insurance as well as education plans for their children and house loan installment.

Both of them had also voluntarily increased their employees contribution to 15% for the Employees Provident Fund (EPF) compared to the usual contribution rate of 11%.

“We are aware though, that we do not have a formal retirement plan in place besides the EPF,” Kavitha admits.

According to Great Eastern Life Assurance (M) Bhd executive vice-president and chief marketing officer Loke Kah Meng, only 34% of Malaysians are putting aside money regularly for their retirement funds, but these may not take into account inflation, the rising cost of living and medical expenses in future, which could be a major financial burden.

“Although EPF savings is one of the main channels to provide for retirement, 99.9% of the contributors would withdraw their EPF savings in one lump sum once they reach 55 years of age and 70% of them would use up all their EPF savings in just three years post-retirement,” Loke notes.

Loke adds that longer life expectancy, delayed marriage and having children later would leave the retirees in a vulnerable position in their old age as they need to need to set aside medical funds for themselves and education funds for their children.

Meanwhile, Prudential Assurance Malaysia Bhd chief marketing officer Thomas Wong, survey findings shows that although Malaysians have a high propensity to save (72% claimed that they do save for retirement), 41% do not have a concrete plan on how to build their retirement fund.

“They just save as much as they can now and hope they will have enough to cover their retirement needs,” Wong says. Wong adds that among those who save for retirement, 77% are putting their money in low-yielding savings vehicles such as bank fixed deposits and savings accounts to accumulate their nest egg.

“Contrary to the common belief that keeping our money in the bank is the best way to preserve our capital, this instrument may not be good enough given that interest rates of bank deposits can hardly outrun inflation,” Wong says.

He also notes that most Malaysians do not segregate their savings for retirement, which made matters worse.

“This means, all their monies are lumped together as general savings. More alarmingly, out of those who consciously separate their savings for retirement, 83% have said that they would use the money should other needs arise,” he says.

This is indeed a risky situation because if they are not careful, they may not have enough money for their retirement, Wong explains.

In addition, a staggering 73% do not seek advice from financial professionals – a behaviour that compounds Malaysians’ poor retirement planning ability further.

“All these could probably explain why about 39% of those surveyed see themselves working beyond the mandatory retirement age, citing income boost as the main reason for doing so,” Wong adds.

Loke advises that instead of relying solely on one’s EPF and personal savings, Malaysians should consider early financial planning, which would save them the stress of dealing with insufficient retirement funds or seeking prolonged employment to ensure financial stability.

“We could plan ahead with investment-linked insurance plans to counter the effects of inflation. In addition, there is also the need to consider providing for your medical needs after you have retired and would be no longer entitled to medical coverage provided by your employer,” Loke says.

Meanwhile, Wong advises that there are a variety of choices available when it comes to building your retirement fund.

“Depending on your risk appetite, investment horizons and affordability, you can invest in properties, equities, unit trusts and investment-linked insurance to name a few. The key is to have a sound investment strategy that is the ability to balance risks and returns effectively according to the desired investment tenure,” Wong says.

Nevertheless, it is always advisable to contact a professional financial advisor or a wealth planner who can provide advice on how to best go about securing your retirement based on your financial circumstances, priorities and needs, Wong adds.

ANDREW Liao, Lee Swee Beng and Yee Foong Kuen are able to enjoy a carefree retirement because they have a steady stream of income and medical coverage, and they get retirement benefits from their previous employers.

Living within their means, their retirement lifestyle is simple yet fulfilling and comfortable.
Abdul Ghani Shahbudin: ‘Savings should ideally be 10% to 15% of one’s income.’

Prudential’s Senior Wealth Manager Abdul Ghani Shahbudin noted that unfortunately, such retirement benefits are no longer available today, with most people depending on their EPF funds as their main source of retirement income.

Sadly, surveys have shown that on average, EPF savings can only last three years into retirement. This means the younger generation has to take ownership of their retirement planning, depending on themselves to achieve their retirement lifestyle.

Basic principles of starting early and maintaining disciplined savings are important in building a solid retirement fund.

Starting early allows the money to work harder and grow bigger through compounding interest. In reference to the retirees’ experiences, Abdul Ghani also stresses the importance of saving and making it a habit. He says savings should ideally be 10% to 15% of one’s income. A retirement plan such as PRUretirement accumulator would be ideal, whereby investing as little as RM200 a month (which can be likened to forced-savings), the money can potentially grow into a sizable guaranteed monthly income of RM870* at retirement.

There is also the flexibility of increasing their retirement fund when there is extra income such as year-end bonus or salary increment.

Lastly, it’s always wise to invest in some sort of protection. Echoing Liao’s advice, Abdul Ghani says if you have a family, it’s crucial to have basic life insurance with medical protection first. Subsequently, other forms of investment can be added or obtained depending on one’s financial capability and the strength of the economy.

(*Estimated for a 25-year-old male, non-smoker, who retires at age 55 and enjoys 15 retirement years.)

THREE couples with different needs posed an interesting challenge for Prudential’s Wealth Manager, Joselin Ooi.

Ooi’s advice to the youngest couple, Mohd Khairi Ibrahim and Fara Lucia Razali, is that they must get into the habit of putting aside a small amount of money every month for their retirement fund.

Starting early buys time, which is the biggest factor in building a retirement nest egg. The sooner they start, the easier it is to reach their goal, thanks to the power of compounding interest.

A retirement plan such as the PRUretirement accumulator would be ideal for this young couple, whereby an investment of as little as RM300 a month (which can be likened to forced savings), can potentially grow into a sizable guaranteed monthly income of RM1,114* upon retirement.

There is also the flexibility of increasing their retirement fund when they have extra income such as a year-end bonus or salary increment.

For Harminder Gill and Balvinder, while they have a savings plan in place and are aware of the importance of planning for retirement like most parents with young children, they currently give more emphasis on building their children’s education funds.

For their retirement, Ooi recommends that they see a professional financial advisor to review and evaluate their financial needs. Knowing the type of retirement lifestyle desired and retirement number is crucial.

Once the couple know their retirement number, a professional can then work out a strategy to ensure they realise their dreams.

Ooi believes that Kelvin Boey and Karin Lim may be the most prepared financially among the couples for their retirement, given their age. Her advice is simple – that the couple review their needs annually.

Every investment has a risk, so it is important to have annual reviews which will help ensure that their savings and investments meet their retirement goals.

The biggest hurdle to achieving their retirement number is inflation.

Investing in a vehicle such as PRUretirement accumulator is an added advantage as it provides capital protection with potential for higher returns.

(*Estimated for a 28-year-old male, non-smoker, who retires at age 55 and enjoys 15 retirement years.)

PETALING JAYA: The number of people withdrawing their Employees Provident Fund (EPF) accounts in the third quarter of this year has increased by almost 50% compared to the corresponding period last year.

EPF CEO Datuk Azlan Zainol said 107,564 withdrawal applications were approved, a jump of 42.9% from the corresponding period last year. However, the amount disbursed was only RM808.53mil, compared to RM874.44 in the third quarter of last year.

Azlan attributed this to the Basic Savings initiative, which enabled younger members to be eligible for withdrawal.

“Since members can only withdraw up to 20% of the excess amount in their Account 1 funds, younger members will naturally have less funds to withdraw for investment,” he said in a statement.

EPF’s Lump Sum Age 55 Withdrawal remained the most popular option for members who had reached the age of 55, with 29,054 applicants withdrawing a total of RM1,236.14mil.

Under the Flexible Age 55 Withdrawals, which allows members to receive their EPF funds in instalments and on an ad hoc basis rather than as a lump sum, 7,154 members withdrew RM403.51mil.

The take-up rate for the Education Withdrawal remained strong, with 16,663 applications worth RM85.01mil approved, compared with RM87.14mil paid out to 15,877 applicants during the same period last year.

The effects of the economic slowdown is reflected in the decrease of applications for housing withdrawal, with only 108,573 applications approved compared to 135,065.

A total of RM1,577.24mil was disbursed, a drop of 19.5% from RM1,960.32mil from the corresponding quarter last yea

I am in Kuala Lumpur for just two days to celebrate AidilAdha here. With my busy schedule on blue ocean, I cannot get back to hometown for this event celebration. Today after visiting some my friends and my boss, I come to office to do little works and update my blog. Here a little bit infos that come from my Firefox browser. Continue reading…