Retirees need financial education


ASK anyone about the importance of planning for their retirement and the answer is a resounding “Yes, it is important”. Yet, no matter how crucial retirement planning is, most people do not seem to have the urgency to equip themselves with the proper financial education to see them through a financially-secured retirement.

In trying to understand the mindset of Malaysians on the subject of retirement and why they lack the enthusiasm to take control of the financial aspect, the Private Pension Administrator Malaysia (PPA) discovered five excuses or myths that deter people from making the first move.

The 5 retirement myths

Myth #1 – Malaysians have the mindset that their EPF savings will be enough to take care of them through their retirement years. But 2011 statistics show this is merely a myth as a whopping 72% of EPF members who are at the pre-retirement age of 54 have savings of just RM50,000 and below. Coupled with that, 50% of retirees spend their entire EPF savings within five years.

Myth #2 – Many people make the assumption that their children can take care of them during their old age, however, due to the escalating cost of living, some children find it difficult to even provide for their own family, what more for their own old folks.

Myth #3 has to do with timing. Some people reckon it is too early for them to start saving for retirement, while others think they can’t do much because it is already too late for them to start. No matter when you start saving, time and the wonder of compounding are your best friends when it comes to retirement savings.

Myth #4 deals with working after retirement. Choosing to work after retirement is one thing, but being compelled to work just to survive is another.

Myth #5 – People have the impression that they can cut back on their expenses when they retire. But in reality, if someone is already used to a certain lifestyle, it is not easy to adjust. In addition, we live in a rising inflation environment and medical cost is continuously increasing. Hence, it is imperative to plan your finances adequately for your retirement.

The BIG retirement problem

Research has shown that the reason people around the world do not plan adequately for their retirement and arrive at their retirement with little or no wealth is mainly due to the lack of financial literacy and being woefully under-informed about the basic financial concepts.

Financial illiteracy may stunt people’s ability to save and invest for retirement, undermining their wellbeing in old age.

Experts often point to poor financial decision-making as a cause of the retirement security crisis and render retirees the most vulnerable to economic hardship in retirement.

The problem becomes more critical as retirees move away from professionally-managed pension toward do-it-yourself financial planning.

This is telling as statistics show more than half of retirees in Malaysia spend their entire EPF savings within five years. It is easy to fall into the trap of depleting your retirement savings if one treats the savings as a windfall and not keep it invested to garner passive income.

Is it imperative to ensure we save sufficiently for retirement for three reasons:

Firstly, it is for the reason of adequacy. Without sufficient retirement savings, retirees will have to depend on others to take care of them, especially if they are no longer fit to work and earn their own income.

How much a person needs for their retirement – whether it is RM800 or RM8,000 – really depends on their pre-retirement lifestyle, health situation and family dependents. The rule of thumb is 2/3 of our last drawn salary is required as retirement income, that is if a person earns RM6,000 before he retires, he will need RM4,000 as his monthly retirement income.

Secondly, it is for the reason of sustainability. Malaysians are living longer and longer. The current average life expectancy of Malaysians is about 75 years and this number is expected to increase to beyond 80 in a few years to come if medical marvels continue to keep us healthy.

This means, Malaysians on average would have to allocate enough savings to sustain 20 years of their retirement life so they do not have to outlive their savings. We are fortunate that the retirement age has recently been adjusted to 60 from 55 years old in order for Malaysians to have a longer accumulation period and be better prepared for their retirement.

Finally, it is for the reason of inflation. Inflation has a subtle and quiet way of increasing the cost of living and eroding our purchasing power. While RM1mil seems a lot today, it may not buy a lot 10 years down the road. As such, we need to make sure our money works hard for us by ensuring the growth rate of our retirement savings and investments is higher than that of inflation.

If the concerns of adequacy, sustainability and inflationary are not taken into consideration when planning for retirement, imagine what one can do with EPF savings of just RM50,000. In such a scenario, the Malaysian government is addressing the issues of inadequacy of savings among the elderly, longer life expectancy, inadequate savings due to shorter period of savings and longer period of spending by reviewing and reforming its pension and social security framework.

This would to some extent ensure that Malaysia would be more ready to meet the challenges. One of the Government’s pension reforms was to enhance the private pension industry by establishing the Private Retirement Schemes (PRS) for individuals to manage and accumulate additional retirement savings as a way to supplement mandatory pension savings.

* Dato’ Steve Ong is the CEO of the Private Pension Administrator Malaysia (PPA). Excerpts of this article first appeared in an article, also written by PPA.

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