DURING our forefathers’ time in a filial society, on top of working hard by being employed or running a business, a large part of retirement planning meant having a large family, as having more children meant having the support to look after them when they grow old.
Why? They had no retirement plans, such as the Employees Provident Fund (EPF) or Private Retirement Savings.
Having more children also meant more chances of success, given the shorter lifespan and higher infant mortality; in addition, risk management came in the form of preference for sons, who are expected to care for their parents, while daughters will be married off to look after their in-laws.
Having more sons is also de-risking the probability that some will not live to old age or become unfilial in their duties. Fast forward to today and these traditions have all but faded away.
But it is worth noting the elements of investing and risk management in order to plan for an uncertain future.
How has investment demand changed with retirement demands over time? Although the target remains the same – retiring comfortably within one’s means, the journey has changed significantly.
There are more options, choices, and more importantly, the ability to switch, rebalance or change the portfolio characteristics in risk/return and volatility.
We now have the option of investing in equities, bonds, fixed deposits, structured products and commodities, not to mention mutual funds and Exchange-Traded Funds.
We have 730 mutual funds in circulation and 947 companies listed on Bursa Malaysia. And that is just for one country alone.
How does one even begin to start when there are over 100 countries in the world that all offer different shades of the same products?
The relative ease with which so many online products can be accessed, and the sheer amount of information available makes investing an almost full-time job.
When you add in more options like cryptocurrencies, private equity, hedge funds, and Equity-Crowd Funding, plus the sobering fact that you need to keep up to date with news flow and economic data, it becomes overwhelming to sift out the noise and figure out what is viable to invest for retirement.
Fortunately, online robo-platforms can help DIY investors achieve a solution-based outcome, the catch being you would have to buy their recommended portfolio of funds/ETFs to achieve the targeted return.
You would need to be quite experienced in all these assets to juggle and adjust your investments constantly to achieve your desired results.
Save for the experienced minority, most investors require holistic advice, not just looking at one’s investment portfolio but the entire balance sheet of assets, properties, EPF, and other savings like insurance and PRS to generate the current portfolio yield.
I personally believe that most people are underinvested in equities which gives a higher portfolio return.
Talk to an adviser who can bring your balance sheet together and formulate a plan based on existing and target yield to help grow your portfolio.
There are mainly two approaches to payment, either the advisor earns from your transaction or the size of assets, and I believe there is a mutual alignment of interests in the latter approach.
The frequent news that EPF savings are insufficient for most people emphasises the greater need for additional savings.
On top of the generally practiced fixed deposits and buying funds, the other approaches are investing in Private Retirement Schemes or contributing up to RM60,000 extra annually into your EPF account.
The EPF option is very welcome as members who have withdrawn their savings during the pandemic can replenish their EPF account when they are paid bonuses in the future. Hence instead of keeping the pay-out in deposit, one should consider these options.
Upon nearing retirement, you must form a decumulation strategy, that is, a plan for extending the life of your assets.
One should not just leave the entire retirement pot in a bank account, which for one, earns very low interest rates, and secondly, is tempting to use. Instead, continue to invest in your portfolio of assets.
One thing to prepare for is the mental acceptance that the portfolio won’t receive regular deposits anymore.
Hence the mindset at retirement is to play more defensively compared to taking on more risk when you are younger, because you know you will continue to receive inflows, which will increase over time with your increments and bonuses added in.
As the decumulation phase emphasises cash flow, it is pertinent to be debt free when you retire.
In fact it would help your portfolio accumulation if you are debt free for a few years before retirement, so your debt payment can go towards your savings.
Another tip is to adjust your lifestyle gradually to free up more cash.
It doesn’t mean you won’t be able to enjoy your holidays as much as before, but maybe not as often. In addition, household expenses can be reduced further.
You should consider enrolling in the Net Energy Metering initiative to lower your electricity bills if you qualify.
One factor that a lot of people overlook is medical insurance due to its cost. I agree that it is not cheap. But it is necessary.
When you retire, your medical bills (and possibly your family) won’t be covered by your employer anymore.
Furthermore, any medical treatment after retirement will mean unplanned usage of your savings.
For this reason, a friend of mine depleted her entire savings pool. Now my nearly 70-year-old friend has to work part time to make ends meet.
Get medical insurance and get it early for yourself and your children while they are still young and healthy. If you have any pre-existing condition (high blood pressure, diabetes) when you apply, your premiums will increase significantly, if accepted at all.
Getting a medical insurance is investing in wholly or partially protecting your savings pool from unforeseen future shocks, as hospitalisation costs can only go up.
If at all possible, invest in the linked-funds method, which entails investing in funds that after ten years should be able to self-fund premium payments, which in turn saves you money.
The Capital Market Masterplan 3 unveiled the future investing landscape and will makes investment products more accessible.
In enabling a multi layered capital market, this should provide more investment choices and access to different products for retirement planners to build a plan for themselves or their clients.
This is a better outcome over having a large family, given that costs of raising a child have risen to the point where it may become a liability that must be carried into the future. Now is the time to start having the conversation with someone. Don’t wait.
Raymond Tang is the chief executive officer of Eastspring Investment Bhd. The views expressed here are the writer’s own.