When savings fall short

DO most Malaysians in the private sector on average have enough savings to retire comfortably? The general answer is no.

That is despite the government reporting that nearly 40% of Malaysians have achieved the Employees Provident Fund’s (EPF) basic savings benchmark.

The underlying fact is that more Malaysians are expected to reach at least this level as salaries and EPF contributions increase as time goes on.

As people retire, they will be replaced by younger, higher-earning individuals, a trend that is already evident.

The number of members who have achieved the EPF’s basic savings benchmark rose to 3.04 million from 2.71 million a year earlier. So the direction is positive.

What isn’t a positive is the amount of money the more senior members of EPF have to work with going by the basic savings amount post-retirement. To compound matters, more than half of EPF members aged 55 and above still have low balances in their retirement accounts.

A report released late last year found that only 21.5% of contributors aged between 56 and 60 had achieved the basic savings benchmark.

That is a recipe for a retirement crisis.

With RM390,000 set as the amount for basic savings, that amount is intended to support a retiree over 20 years, according to modelling done by the EPF.

However, as modern medicine progresses and people live a healthier life and longer, retirement savings may need to last well beyond that period.

Going by the RM390,000, it is calculated that withdrawals will start at RM1,625 a month and rise to RM4,434 in year 20.

By comparison, for members with EPF’s enhanced savings level of RM1.3mil, monthly withdrawals will begin at a more comfortable RM5,417 a month and rise to RM14,780 in year 20.

At RM1,625 a month, a retiree would be living below Malaysia’s minimum wage of RM1,700 unless they have supplementary income.

The person will be living a very frugal life, even assuming there are no housing loans or rent to pay for. Such a subsistence life in the long run might well take a mental toll on a retiree, especially if they are in the pink of health.

Those who don’t have any health issues will surely want to live life way better post-retirement, but travelling the world will be too rich for their balance sheet.

Scaling back to frugality will be difficult in the long run, and that is if they are disciplined to live off that amount in the first place.

The pressure on daily life will compound if there are dependents to provide for – RM390,000 will not be sufficient in that scenario for 20 years.

More than 90% of Malaysians choose to withdraw their retirement monies as a lump sum, with some exhausting those funds in a few short years.

They then have to rely on their immediate family for support or government assistance as hardcore poor, ultimately drawing on taxpayer-funded social support.

With more than 80% of Malaysians now living in an urban setting, that amount of money will be tough to survive on.

Inflation in urban centres is higher than the national average

But Malaysians have become accustomed to a different financial discipline from the past. Baby boomers and Generation X grew up when savings were being preached as the norm.

Not everyone followed that mantra but now with the YOLO (you only live once) mentality and high household debt, spending has taken over in terms of what was prioritised in the past.

The low retirement funds need to be seen from the perspective that healthcare costs will be a big factor for retired private sector personnel. Medical inflation has been much higher than the average inflation rate.

Retirement adequacy must also be viewed in the context of rising healthcare costs. Medical inflation has consistently outpaced overall inflation, meaning retirees may need significantly more savings to maintain their quality of life.

Taking in hospital bills, surgeries and insurance, that rate of inflation is in the double digits. Such expenses can strain and deplete savings much faster than what the RM390,000 basic savings is supposed to provide.

With Malaysia already an ageing society, what retirees have to contend with is the rising tax burden on the population. An aged society will have fewer productive people working and paying taxes, and that can lead to a rise in taxes, in this case indirect.

This will squeeze just how long retirement funds are supposed to last for an individual.

If a retiree owns a home, then they have the luxury of either selling that house and renting to improve their monthly expenses. Those who choose to keep their homes will have to deal with maintenance costs, which will only go up as a home gets older, putting more strain on retirement savings.

Another consideration for many retirees, regardless of how much savings and assets they have accumulated, is leaving a financial legacy for their children.

I disagree that once parents have raised their children, they should be left to fend for themselves to learn discipline and self-reliance.

With declining birth rates and an ageing population reshaping the economy, future generations may face challenges which are very different from those experienced by their parents.

In that environment, preserving capital and passing on wealth could become increasingly important, given the growth model will come to an end.