Retire Gracefully

 

"If we do a little financial planning we can avoid spending all retirement fund too fast."

Based on the Employees Provident Fund’s (EPF) statistics, while the average life expectancy of the Malaysian population is 75 years, 50% of its retired members spend their entire EPF savings within 5 years after withdrawal. If we do a little financial planning we can avoid to be a part of the above statistics.

Here are two broad categories of what we can do:

1. To protect our EPF savings and spend the savings wisely to generate income during retirement,
2. To nurture multiple “financial nest eggs” and not just rely on EPF savings as our sole source of retirement fund.

 Protecting EPF Savings

1. Buy Property

When we withdraw EPF savings between the age of 50 to 65 years, one of the most sensible ways to protect its value is to buy a piece of rental property. This property can be a condominium at a prime location (with proven demand for rental property), a low-cost apartment bought through an auction, a single-storey shop at a busy but cheaper part of town, a piece of plantation land shared with family members, etc.

Such property should generate passive income for our retirement, both its income and asset values are protected against inflation and, unlike unit trust funds, depletion.

2. Leverage with property loan

If you pay the entire purchased property with your EPF savings and yet you wish to use part of your EPF savings for such purposes like starting a small business, buy gifts for family members, medical expenses, etc., you can obtain the cash upfront by arranging a property loan and let the rental income pay off the loan by instalments.

At the age of 50, when you withdraw your entire savings in Account 2 to buy a property, you are still eligible for a 15-year housing loan or two-generation loan. As long as the rental income is sufficient to pay for the monthly loan installment, you can use part of the EPF savings upfront. The loan will eventually be paid off by the rental income that you receive. You will still hold the ownership of the property. At the end of the loan tenure, you continue to receive rental income.

It is also possible to buy a property with a price beyond your EPF savings. At the age of 50, withdraw your entire Account 2 to pay as down payment of a property and get a 15-year housing loan or two-generation loan. Pay the property loan installment with rental income and/or your salary income before your retirement.  At the age of 55, withdraw all your remaining EPF savings and pay down the loan. With careful planning, you may need to work just a few more years to have a piece of rental property free of mortgage payments.

These are just a few examples. There are many possible arrangements with rental properties, EPF savings, monthly salaries and property loans. It depends on your scenario. Plan it wisely.

* You don’t have to wait until 50 years old to withdraw your EPF’s Account 2 for your first or second residential properties (Please check the specific conditions stipulated by EPF).

3. Buy Shares

Besides properties, shares are also good instruments to hedge against inflation. This option has higher risks for people who are not so financially savvy. The key is to buy blue chip stocks that generate positive cash flow, growing profits and consistently declare good dividends. And buy these stocks at fair prices.

It is easy to find such good stocks simply by following good fund managers who are famous for value investing. Just read the annual reports of their funds. One of such funds is listed in Bursa Malaysia’s main board, i.e. icapital.biz Berhad. Read its annual report to find out the stocks that the fund invested in.

The next step is to buy these good stocks at fair prices. Learn the ratios like P/E (price earning) and dividend yield. Learn about the business cycle and that when interest rate goes up, general market share prices come down and vice versa. It is about a simple idea of buying at low prices and receiving dividends for the long-term. You may not catch the bottom, but as long as you are not buying at a ridiculously high price, with holding power you can hardly lose money on these blue chip stocks.

If you think that trying to time the stock market is a bit too stressful and “risky” then just buy these selected good stocks progressively and periodically over a period of one to three years using your EPF savings.

4. Monthly withdrawal

Some may suggest that in order to prolong the period of depleting our EPF savings, we should opt for monthly payment withdrawal instead of a lump sum withdrawal. I just think it will be more rewarding to take out the entire EPF savings if you learn to invest carefully and wisely into rental property or shares. Due to high inflation rates, the return of investing in properties and shares is always higher than the dividends paid out by EPF.

Ultimately the above suggestions cannot work properly if there is no other source of retirement funds besides EPF. We need to build multiple “financial nest eggs” before we hit retirement age.

To build more financial nest eggs other than EPF

1. Private Retirement Scheme (“PRS”)

In 2012, a new type of fund was approved by the Malaysian government as an alternative solution for employees or self-employed persons to save for their retirement. It is called a Private Retirement Scheme. There is no fixed interval or fixed amount to invest in such schemes. It is entirely up to the investor on a voluntarily basis. While you can withdraw 30% of your invested fund once a year, you can only withdraw the remaining 70% upon reaching retirement age.

I am not a fan of investing in managed funds but this PRS fund has a unique feature. For the first ten years from assessment year 2012, your annual contribution into PRS fund, up to RM3,000, is tax deductible. This is in addition to the RM6,000 tax deduction permitted for EPF contribution and life insurance premium and the RM3,000 tax deduction permitted for education or medical insurance premiums.

If you invest RM3,000 in PRS funds annually for the next 9 years and your tax bracket has hit 26%, your return from such tax incentive alone would be 4%-5% in average annually for the next 9 years on top of the return from the fund performance. Of course, the return from fund performance depends on the fund manager of the fund you choose. There are many insurance and unit trust companies offering PRS funds.

Build a few “financial nest eggs” that generate income in retirement years

2. Property, again

I cannot help but notice the characteristics of the people around me who had reached their retirement age without financial worries. They may or may not be “financially literate” in our definition, but they made good buying decisions when they were young.

Almost all of them bought some form of properties like shops, apartments, small pieces of land, big houses, etc. They were not rich people or high income earners when they were young. Among them were fishmongers, tailors, grocery shop owners, teachers, office workers, accounts executives, etc. They saved money diligently and at one point or other in their lives, they bought a piece or a few pieces of important properties, alone or shared with someone they trust, that in later years bring in passive income or a lump sum fund for their retirement. There was no fancy financial instrument.

3. Shares, again

Some of them do hold shares.

The logical way is to invest in shares with consistent earnings growth and consistent dividend payout. There are quite a number of such stocks in Bursa Malaysia. You just need to buy them at fair prices and keep them for long term.

From friends and relatives, I also noticed that some who made money in stock markets follow a few good blue chip shares closely. They do not trade these stocks actively. They bought these stocks in the year when the market was bad and sold these stocks in the year when the market was good.

4. Skills and lifestyles

If you love your work and if your experience or knowledge are in demand, you can choose to continue to work after reaching your retirement age. I know ex-teachers who are giving tuitions. I know one ex-manager who turned into a high earning consultant helping companies to set-up production plants as he has specific knowledge of the industry. Are you accumulating the right experience so that you can continue to do what you love and earn income in the supposedly retirement age?

There are many non-financial ways to deal with financial issues like savings depletion.

For instance:

Keep a healthy lifestyle when young to avoid diseases or sicknesses caused by alcohol, cigarettes and excessive “good” food. Diet and exercise may help you save some medical bills avoiding alcoholic liver disease, diabetes, high blood pressure, etc. It is not a 100% guaranteed preventive measure but it is definitely worth a try.

Observe how your grandparents support their retirement years, i.e. by having children, giving them education and instilling good values. Make sure you treat your parents properly to set a good example for your children to learn filial piety.

For most of us, EPF savings alone is not enough for retirement. EPF savings should not be our only source of retirement funds.

While there are many good ideas from the internet, books, TV programs, online and real life courses, etc, the success of retirement planning depends on fine execution of good ideas. We just need to continue to explore and learn. Try to attend property seminars or financial courses to learn the proper execution details to avoid serious mistakes. One of the best ways to learn how to deal with financial issues of retirement is to talk to those who are living happily in their retirement years.

This article is contributed by Financial Planning Malaysia dot com, a pioneer Malaysian financial education blog with quirky but logical ideas. Since 2005.

Clement Jouling ialah Perunding Unit Amanah berlesen (Licensed Unit Trust Consultant). Sekiranya anda berminat untuk mengetahui lebih lanjut tentang pelaburan unit amanah, boleh hubungi beliau terutamanya buat anda yang berada di Kota Kinabalu dan sekitarnya.