With people living longer, marrying and havingchildren later and not saving enough, facingretirement is a challenge. While there is growingawareness about the need to plan, less than 5% areprepared for retirement and fail to take intoconsideration inflation rates and rising medicalcosts.
IN 1981, when Azman graduated, he got a job in KLwhich paid him RM1,800 a month. He bought an importedMazdaat RM17,000 and months later he put down moneyon a RM78,000 single-storey terrace house.
Today, 25 years later, Azman's daughter has justfinished university. Her starting pay is RM1,800, justlike her father's two and a half decades ago.
Long road ahead: With the life expectancy of men at 72and women at 76, most people have a good 20 years tolive after retirement. But unlike her father's time, imported cars cost overRM100,000 today. So Latifah has opted to buy a Protonfor RM45,000 (more than double what her dad paid forhis first car).
While her father could afford to buy a house early inhis career, Latifah can't. Houses in KL these dayscost at least RM200,000, so she has to work for a fewyears first before she can own one.
Compared to 25 years ago, the prices of goods, food,petrol and electricity have all gone up.Understandably, it's an uphill task for Latifah tosave on herRM1,800 salary, since the purchasing powerof her salary is much lower than her father's back inthe 1980s.
It is a fact that wages have not moved in tandem withthe rise of the cost of living and inflation. Thattrend is expected to continue.
And if people do not start planning early for theirretirement, they are going to find themselves in aspot after they turn 55.
Today, three meals cost you RM20 but in 20 years time– with an inflation rate of 6% a year – you will needRM64 per day for the three meals, estimates financialconsultant Hazel Ong Archibald of CIMB Wealth Advisors(see Chart 1). The government puts inflation rate at3.2% to 4.8% but Ong says in urban areas, that figureis about 6%.
So while the RM500,000 in your EPF or bank account atretirement might look good on paper, she says, if youdo not invest that money to make it grow at a ratehigher than the inflation rate, 20 yearslater, itwould be worth only RM145,053 in purchasing power!
While there is more awareness about retirementplanning these days, particularly in the urban areas,in reality this does not often translate intopreparedness.
Why?
“Because it is more pleasurable to spend than tosave,” opines Ong.
People understand – at head level – the need to planand save, she says, but at heart level, emotions ruleand instant gratification wins the battle.
“I wanted to persuade a friend to save for the futurebut she kept saying she had no money but then later Isaw she could sign up RM3,000 and RM5,000 for someslimming packages!”
Reality hits when people find that they cannot affordto retire because they had not seriously put aside themoney early on in life.
Ng: ‘Less than 5% are prepared for retirement’ “Less than 5% are prepared for retirement,” estimatesLife InsuranceAssociation of Malaysia (LIAM)president Ng Lian Lau.
He says those in their 20s think they are too young tothink about retirement, while those in their 30s and40s tend to believe they are doing enough because theyhave their EPF savings, and those who are 55 feel itis just too late for them.
And the truth is at 55, most people cannot afford toretire.
“People are living longer, life expectancy for womenis 76 years. For men it's 72. With this kind oflongevity, people have got more than 20 years afterretirement. 60 would be a more ideal retirement age,”he says.
People are marrying later too, points out Ong.
Which means they are having children later in life. Ifa person has a kid at the age of 35 and retires at 55,the odds are that his child at 20 would probably stillbe at university or college and his education requirefinancing.
On average, the Malaysian household spent 5.7%oneducation last year. With the cost of education risingby 6% each year, this is expected to climb steadily.
While parents might buy an education insurance planfor their children, Ong has found that 90% of the timethe amount is insufficient. More often than not,parents are willing to give up “everything”, includingtheir own retirement fund for the kids. Which leavesthem in a vulnerable position in their old age, unlessof course their children provide for them.
As for life insurance, only 40% of Malaysians arecovered. Ng says this is a small number compared to100% in Singapore, 80% in the United States and 400%in Japan (where one person has four policies onaverage).
Ong: ‘Inflation rate in urban areas is 6%’ And even if one has a life policy as well as savingsfrom the EPF, people should still worry aboutretirement. This is because without a new source ofincome, that money would runout. This is especiallyso if one runs into health problems which is commonwhen people grow older.
“Medical inflation is easily 15% each year. And thiscould really eat into the savings,” warns PrudentialAssurance Malaysia Bhd CEO Tan Kar Hor.
Tan likens the medical bill as a “hole” which if notplugged would leak away one's entire retirement andsavings.
“It's only a question of how the big the hole is,” hesays.
So parliamentary secretary to the Finance MinistryDatuk Seri Dr Hilmi Yahaya's announcement on Thursdaythat amendments to the Employees Provident Fund Actwould allow contributors to withdraw money to buyinsurance for critical illness for themselves andtheir family is welcome news. The amendment Bill waspassed in Dewan Negara that same day.
So how much would one need for retirement?
Experts say this depends on the individual and hislifestyle. And how much he iswilling to reduceconsumption – to eat out less often, buy fewer things,live in a smaller house, drive less, drive a smallercar and travel less.
The rule of the thumb, says Ng, is managing on 60% ofyour last drawn pay.
For Ong, it's 70% of one's current lifestyle. If afamily in Kuala Lumpur with two kids and two carsneeds RM5,000 today, at retirement, expenses should godown to RM3,500.
Even based on this calculation, one would needRM747,000 if one were to live for 25 years afterretirement, and RM806,200 for the next 30 years,factoring in the inflation and interest rates.
Going by statistics revealed in EPF's 2005 annualreport, about 90% of EPF contributors have less thanRM100,000 in their accounts. So sole dependence onone's EPF savings as a safety net is not good enough.
Assuming that one can live on RM1,000 a month, tosurvive for 25 years, one would still need asubstantialRM300,000 and for 35 years, RM420,000.
Bank Negara's Counselling and Debt Management Agency(AKPK) CEO Mohamed Akwal Sultan reckons a personshould not start purchasing big assets like propertyor a house late in life as the danger is that oncethey have retired they may not be able to meet theinstalment payment on it.
“When you are in your late 40s, you should be windingdown and not committing to high expenses to buy bigthings,” he says.
AKPK has dealt with a number of cases where retireeshave had banks auction off their houses because theycould not meet the monthly loan payment.
There is also the problem of credit card temptation.Ng notes a worrying trend that more and more youngerpeople are becoming bankrupt as they are spending“tomorrow's money”. Which basically means these peopleare not saving or building their retirement nest.
Ideally, Ong says, people should start saving fromthetime of conception; that way would be able to enjoythe magic of the compounding effect .
Prudential's Tan says a noticeable trend is that whilethe younger generation is prepared to invest in newfinancial instruments, the older generation gravitatestowards fixed deposits.
“That is very risky because you would not be able toaccumulate enough because the interest rates can'tmeet the inflationary rate and your money is gettingsmaller,” he says.
He believes given the current life span, it would doretirees good to be more aggressive in theirinvestment.
“In investing, you should not be looking at the dateof retirement but rather the date of potential deathwhich is probably still another 21 years away afterretirement,” he says.
He recommends that people only keep about six monthsof their monthly expenses in the savings and FDs andput the rest in investment productsthat generate moreincome than the inflation rate.
Ng believes a good private pension would help peoplein their retirement years. In developed countries,money put into savings for retirement is not taxable,neither is the profit from that investment.
“When you retire, you can't take the money out in alump sum either or you'd have to pay tax on it. Thiswill force you to withdraw your money on a regularmonthly basis for retirement because that's tax free,”he adds.
Singapore has such a scheme, the voluntarySupplementary Retirement Scheme, which complements theCentral Provident Fund (CPF). Such a scheme has nottaken off in Malaysia for a number of reasons, saysNg.
It would be a loss of revenue to the Governmentbecause people would not be paying taxes on money putaside for retirement. It would benefit only the richand middle income group as the poor might not be ableto afford it, headds.
“Perhaps it hasn't taken off too because the Malaysianeconomy is pretty dependent on consumer spending. Andthe Government wants you to spend,” he adds.
Ng says there should also be an asset liquidation lawin the country. It is puzzling that there are allsorts of incentives for asset accumulation, he says,but none for liquidation.
An example of asset liquidation would be to reversemortgage your house to the bank in return for aguaranteed monthly income until you die.
The asset would at the end of the day belong to thebank or insurance company. But in the meantime, theperson has the right to continue to live in the houseuntil death and get a monthly income too.
“If they outlive the value of the house, the bankloses,” he says.
As our population ages and life expectancy increases,more thought must be given by both individuals and theGovernment on how to develop a cultureof planning andsaving for one's retirement.
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