We always find ourselves thinking about what the future holds. You’ve probably envisioned how your life will be like in your 30s, 40s, 50s and ultimately, your retirement.
Many thought that retirement is the end-goal, and the nearer we get to that finishing line, the more excited we are to finally realise our dream retirement. However, it would be an understatement to say that this excitement is often laced with a little fear and anxiety – because leaving employment and watching your retirement plan finally in motion can be a little scary.
Will you really have enough to travel the world? Will you be able to settle all your debts before you say goodbye to your income?
There is no right or wrong answer, but it’s not always a happily-ever-after tale for retirees.
According to the Malaysia Department of Insolvency, about 12.83% of bankruptcy cases filed in 2014 were by people 55 years and above, while in 2013, it was only 1%! This is a significant increase in numbers of Malaysians declaring bankruptcy in their retirement years.
The truth is, no matter how much we plan and save when we are working, a wrong move or even an inaction could leave us destitute in our golden years. Here are 5 common causes of retirees going broke and how to avoid them.
1. Failing to plan for your retirement income
So, you’ve saved up a certain amount of money for your retirement. Congratulations, but whether your money can outlive you really depends on how you manage it post-employment.
Though retirees have significant lower risk tolerance in investment, it is still a bad idea not to put your money in well-placed investments. Some of the investment products that can offer you regular income, protect your capital and still offer very little risks are money market funds or fixed income funds.
One general rule for retirees is the 4% rule. The 4% rule says retirees can withdraw 4% of their retirement money in their first year of retirement, and adjust that amount for inflation every year.
Why 4%? This is assuming that your retirement fund is invested and is able to get a conservative return of 4% per annum. Here’s an example of how the 4% rule works:
|Total retirement fund||RM800,000|
|1st year withdrawal||RM800,000 x 4% = RM32,000|
|Monthly retirement income for Year 1||RM32,000 / 12 = RM2,666|
The trick to this is to leave your remaining retirement fund in a well-balanced investment portfolio that matches your risk appetite. Let’s say the remaining fund is able to generate a conservative 4% per annum returns.
|Total retirement fund||RM768,000 + 5% = RM799,289.50|
|2nd year withdrawal||RM799,289.50 x 4% = RM31,971.58|
|Monthly retirement income for Year 2||RM31,971.58 / 12 = RM2,664|
By doing this, you are likely able to stretch your retirement income over the next 20 years and more. This rule also allows you to adjust your percentage of withdrawal according to the returns. If interest rate is low for the year, then you can lower the withdrawal to 3% to protect your savings from eroding more than it is earning.
2. Failing to review your investment portfolio
Yes, we’ve established the fact that investing your fund even in your retirement years is important. However, if you fail to review and design your investment portfolio according to your life stages, you can risk losing your retirement fund.
According to experts, there are three phases to retirement planning, and each phase requires different investment strategies.
|Accumulation phase||Transition phase||Distribution phase|
|Age||In employment, before 50 years old||Pre-retirement, or 50 to 60 years old||Retirement, or 60 years old and above|
|Investment goal||Build assets||Position assets for growth, preservation and spending||Balance growth, preservation and spending|
|Asset allocation||Aggressive||Reduce risk gradually||Balance distributions with growth potential|
Typically, one becomes less tolerant to risk as he/she nears retirement age due to a simple reason, the nearer you are to retirement age, the less time you have to accumulate wealth. If you make an investment mistake at 55 years old and lose 20% of your retirement fund that took you 10 years to save up, you may not be able to make it back before you retire.
Just like in the accumulation phase, investors should always review their investment portfolio to ensure the asset mix still fits their risk profile. This is especially important in the transition phase, as exposing your investment to too much risk can have dire results in your life-long savings.
3. Failing to downsize your lifestyle
Many retirees choose to downsize for a very practical reason: to cut cost. Though they may not be hurting financially, downsizing is still the right move because, why spend more when you can spend less?
With the kids gone, it just doesn’t make sense to maintain a semi-detached home for just you and your spouse. Imagine the cost of maintaining the huge home, and the utilities fees involved.
You don’t have to view downsizing in trepidation. A lot of the assets you’ve amassed when you were still in the workforce are assets that help you with your wealth accumulation. For example, you and your spouse need a car each to get to work, but now in retirement, you can just share a car. This will inadvertently cut your transportation cost in half. Remember, not discarding the excess in your retirement means you will have to maintain those assets, which costs money.
Sit down and discuss with your family before retirement comes around to decide what excess you can forego and how much costs you can cut from your monthly expenses. This will give you a better idea of how much retirement income you need when you finally leave the corporate world.
4.Withdrawing your EPF savings too early with no plans for the money
Many Malaysians are banking on their Employees’ Provident Fund (EPF) savings and are counting down the days to when they can get their hands on their hard-earned money.
EPF allows pre-retirement withdrawal at age 50, where members can withdraw a certain amount from their savings to make the necessary preparations for their retirement. This may include clearing off debts, or even setting up a small business to replace their income in retirement.
At age 55, EPF members can make full retirement withdrawal, which allows them to withdraw all of their savings.
The problem with this is, most people who make these withdrawals are treating the money as windfall instead of their hard-earned money. This is a dangerous way of thinking because according to the National Endowment for Financial Education, as many as 70% of those who receive a windfall will lose it all within a few years.
Instead of thinking that the money from your EPF savings is infinite, have a clear plan on what to do with the money. If you don’t need a huge sum at the moment, you can continue to let the money grow with EPF and earn on average 6% dividend every year.
5. Failing to plan for medical costs
It’s true. Failing health can ruin your finances, retirement or not. However, it is even more likely to happen in your retirement because it is a well-known fact that health declines with age. This is also why health insurance increases in premium as you age.
According to a study by Institute for Fiscal Studies (IFS) in the UK, for the average person, the amount of healthcare resources they consume begins rising significantly around the age of 50 and rises particularly sharply beyond age 70.
The question to ask now is, do you have a medical insurance policy? If not, will your retirement savings be able to take the hit?
With life expectancy increasing, we can expect our retirement years to be long, and if we are well-prepared, it will also be fruitful and comfortable.
One way to do that is, don’t drop the ball on your medical insurance. It is becoming more important than ever to own one in your retirement. You should also ensure that your coverage is adequate and is able to weather the high medical inflation every year.
If premium payment is an issue, opt for monthly premium payment to split the premium into smaller amount every month. When you are planning for your retirement, take insurance expenses into consideration.
Running out of money in retirement is a fear that most retirees have, and it comes as no surprise. With the ever increasing cost of living, keeping our wealth when we are no longer working seems to be a tall order.
Coupled with the fact that people are living longer than ever, it may seem impossible to make our nest egg last as long as we do. However, if you are committed to accumulating assets for your retirement, and do all the right things at the right time, you may just realise your retirement dream when your last day of work comes around.