Managing finances in your golden years – the do’s and don’ts

MANY Malaysians risk running out of money during retirement. And this reality is not far from truth.

With no active income coming in, retirees would rely on their reserves (savings) and passive income streams such as investments, interests from fixed deposits and rental income to see them through their golden years.

However, a retiree’s passive income is worth less today due to it being impacted negatively by the rising inflation. With insufficient passive income, retirees have to fund their day-to-day expenses by digging into their retirement assets sooner.

The problem is that the retirement assets, painstakingly saved over the years, will run out faster than planned and be depleted before the end of the retirees’ lifespan.

Even if a retiree then turns to invest his money to beat inflation, he won’t have the luxury of time to weather the dips and spikes like in his younger days.

Given the circumstances, what should and shouldn’t a retiree do to build and maintain his nest eggs efficiently?

Below are some of the important do’s and don’ts I have advised my retired or nearly retired clients on a daily basis. Let’s start with the don’ts.

> Don’t settle all your loans

To enjoy a peace of mind, you may decide it is best to settle all your outstanding loans and start your retirement journey on a clean slate.

This isn’t necessarily the case. It is good to keep some credit lines open to take advantage of the availability of cheap money when interests are low.

If you settle all your loans, it will be very difficult to apply for new lines of credit once you become a retiree with no documented source of income.

Having said that, you should not start your retirement journey with excessive debts either. A healthy debt to asset level should be no more than 50%, while 30% or less is ideal.

If you have multiple outstanding property loans to settle, consider selling off the properties that are either underperforming or not generating enough return on investment (ROI) in terms of rental income to settle the loans first.

> Don’t invest all your money

Even in your later years, you may catch the investment bug and be tempted to start channelling all your savings into investments in order to grow your wealth. However, this is very risky and not advisable as it may impact your financial health.

Retired or non-retired, one should always have sufficient cash reserves to have a holding power to avoid fire sales and major loss.

Take the example as in the chart. This is a snapshot of the investment portfolio of my retiree client. Had my client needed any cash around the time the market crashed in November 2009, after having invested all his money, he would be forced to cash out his units at a 20% loss.

However, because he had the holding power, he was able to wait it out for three more years until the market bounced back, gaining 21% returns instead.

Therefore, ensure that you have enough savings to wait out market dips that happen every now and then. By the rule of thumb, make sure you have three years’ worth of expenses saved up to fall back on during tough times.

> Do not buy into unnecessary investments

Not all investments are going to help you grow or maintain your wealth. Some will have the adverse effect.

There are six main investments to avoid:

> Avoid potential scams. For example, money games, online investments etc.

> Avoid promises of abnormally high returns

> Avoid leverage investment. For example, margin financing for share investments or exchange-traded fund-type of investments

> Avoid unregulated investments

> Avoid regulated but unclear investments, especially the ones that you don’t understand

> Avoid regulated but risky investments. For example, a regulated investment that results in 10% to 20% loss of retirement nest eggs can lead to a financial disaster.

> Do not start a business

Starting a business in your retirement or nearing retirement is a risky move that usually requires more money than expected.

This may put a strain on your retirement assets, especially in situations where you have to sign a personal guarantee for the business.

> Do not make major financial decisions without a financial plan

A holistic financial plan that takes into account all of your major financial decisions allows you to project the trajectory of your net worth as you proceed through the years.

Doing this will allow you to project your cashflow and the consequences of making major financial decisions. Some financial commitments may impact your future cashflow drastically, thus needing you to sell off investments at a loss.

To see if you can afford major financial decisions like buying a house, investing in a business, etc, make sure that you take a look at your holistic financial plan to avoid any drastic cashflow situation.

Meanwhile the list of do’s for retirees are:

> Do get a holistic financial plan done

If you haven’t already had a holistic financial plan, do get one drawn up with a licensed holistic financial planner as soon as possible.

Project all your expenses beyond the age of 85. For example, factor in special vacations, your living expenses, nursing care and medical expenses.

Incorporate any foreseeable extra responsibilities that may require the utilisation of cash, such as support for your elderly parents and funding for your children’s tertiary education.

It is crucial to factor in inflation to ensure that you are not blindsided. By having a detailed projection drawn out, you’ll be able to ascertain if you have enough to last beyond the age of 85.

If you don’t, adjust the plan. Consider reducing your expenses or target investments that have increased returns.

> Do invest in a globally diversified and safe portfolio

While it may be tempting to conveniently turn to that one fund that has been performing for you, a globally diversified investment portfolio is diversified in the category of investment and across the region.

This ensures that when one sector or country is not doing well, you have other investments to bolster your losses.

A good ROI target would be between 7% and 9% compounded returns to beat the inflation and to grow your wealth. Finally, avoid putting all your cash into a fixed deposit, as the returns can’t beat inflation.

> Do plan your retirement income

Once you’ve done your projections, make sure you know where your retirement income is coming from.

For example, if you need RM100,000 a year for your retirement expenses, do you know which sources the money would come from?

Is it from your Employees Provident Fund dividend, fixed-deposit interests, property rental or other sources? It is important to know this in advance to avoid any complications.

I once had a client who was relying on the rental income of several properties to fund his retirement. However, during the Covid-19 pandemic, properties became harder to rent out and thus his income was affected.

As a result, he had to dig into his fixed-deposit funds prematurely to maintain his cashflow, causing him to lose out on the interest income.

> Do review your insurance needs yearly

Your insurance needs change as you progress through life. Ensure that you review your coverage annually. Cut the irrelevant insurance if needed to improve your cashflow.

For example, if your dependents are all grown up and not financially relying on you anymore, you may be able to cut out the death coverage from your life insurance and channel that money into a fixed deposit or your investment portfolio instead.

> Do review your will and trust yearly

As a part of your legacy planning, it is advisable to review and update your will and trust yearly when you are in your golden years.

For example, if a child has moved oversees, or you have a new grandchild in your family, you may want to update your will to reflect these changes in your family to help facilitate the estate distribution process smoothly after your death.

It is also important to communicate these arrangements and changes to your impacted family members. Doing so can help smoothen the estate-distribution process after your death and reduce any unnecessary taxes, expenses or losses to your estate.

Not surprising, with inflation rates skyrocketing and multiple crises happening around the world, markets have also generally been weak and unforgiving; the life of a retiree in times like this can be challenging.

Abiding to the do’s and don’ts can help mitigate any money pitfalls.

However, to gain better clarity of your finances, I recommend meeting with a holistic licensed financial planner to help facilitate the projection of your retirement nest eggs.

With that in the bag, you can almost feel certain that you will sail through your golden years with ease.

Yap Ming Hui is a licensed financial planner. The views expressed here are the writer’s own. Any reliance you place on the information shared is therefore strictly at your own risk.