Retirement Planning in Malaysia
Essential Tips to Secure a Financial Future

In today's ageing society, planning for your future is vital and more urgent than ever. A well-constructed retirement plan can guarantee security and provide peace of mind in your later years.

However, many Malaysian still need to learn about the actions they need to take to have enough for the years after they stop working.

What is retirement planning?
Retirement planning is creating a strategy to ensure that one has sufficient financial resources to support their lifestyle during the later years. 

In practice, it primarily involves estimating one’s expected expenses and income and determining the savings needed to maintain their desired standard of living. 

Investment decisions, considering various tax implications, and evaluating different options for generating retirement income are also part of the process. 

Why is retirement planning important?
According to the National Population and Family Development Board, Malaysia's elderly population is expected to reach 2.9 million by 2025, up from 1.8 million in 2010. This highlights the need for individuals to start planning their retirement early to secure their financial future.

Other reasons for its importance are:

• Ensuring financial stability: It enables individuals to determine how much money they will need in retirement and how to save for it. This can provide financial stability and peace of mind.
• Avoiding financial dependence: Without proper planning, individuals may have to rely on others for financial support, which can be burdensome for family members or the government.
• Maintaining lifestyle: The cost of living in Malaysia is increasing, and without proper planning, individuals may struggle to maintain their standard of living once they stop working. Organised retirement planning helps individuals estimate their expected expenses and plan accordingly.
• Maximising retirement income: Choosing the right investments and income sources will maximise retirement income.
• Meeting long-term goals: Individuals can meet long-term financial goals, and will not have to sacrifice passions such as travelling or hobbies, or helping family members.
• Easing the transition to retirement: Having a good plan in place eases the transition from working life to retirement. It can help individuals adjust to a new routine and provide a sense of security and purpose during these years.

How much should I save for retirement?
The amount required depends on several crucial factors, such as expected expenses, ideal lifestyle, and the age you want to stop working. The following are essential considerations to keep in mind:

• Expenses during retirement: It's important to estimate the costs that you will incur. This includes housing, transportation, food, and healthcare. Also, consider the impact of inflation and the increasing cost of living.
• Age of retirement: Decide the age at which you plan to retire, as the earlier you do so, the longer your savings must sustain you.
• Current savings and investments: Consider your current savings, investments, and any pension plans or other retirement benefits you may receive.
• Desired retirement lifestyle: Consider the kind of lifestyle you wish to lead, including travel, hobbies, and other activities.

A retirement calculator can estimate the amount you need to save monthly or yearly to achieve your goals. Financial experts generally recommend saving at least 15% of your annual income for retirement, though this may vary depending on individual circumstances and objectives.

Regularly reviewing your retirement savings plan and making necessary changes is also vital to ensure that you are on track to achieve your goals. Furthermore, the advice of a financial advisor can help create a personalised plan and provide guidance on saving and investment strategies.

Things to consider when planning for retirement
First and foremost, have a ballpark figure of how much is needed for a comfortable retirement. This naturally will depend on many factors like age, lifestyle, income, etc.

There are five key steps to consider:

1. Time horizon
One of the critical factors to consider is your time horizon. The time between your current and expected retirement age sets the foundation for an effective strategy.
If you are young and have 30 or more years until retirement, you can afford to have a higher portion of your assets in riskier investments, such as stocks. This is because stocks have historically outperformed other securities, like bonds, over extended periods.
It is also crucial to have returns that beat inflation to preserve your purchasing power. Inflation starts small but can grow into a substantial force over time, eroding the value of your savings. For example, a seemingly low inflation rate of 3% can decrease the value of your savings by 50% over 24 years.
Your portfolio should focus more on income and capital preservation as you age. This means having a higher allocation in less risky securities, such as bonds, that provide less return than stocks but are less volatile and provide income to live on. So, for instance, a 64-year-old retiring the following year will not have the same concerns about a rise in living costs as a young professional who has just started their career.
Thus, a multistage retirement plan must consider various time horizons and corresponding liquidity needs to determine the optimal allocation strategy. You should also regularly rebalance your portfolio as your time horizon changes.

2. Spending needs
Forming accurate assumptions about your expenses after retirement is crucial for determining the necessary size of your savings.
For example, it’ss common for individuals to expect their yearly spending to decrease to 70-80% of their pre-retirement expenses. However, this estimation can often be incorrect, particularly if you still have mortgage payments or face unexpected medical bills.
Additionally, retirees may indulge in travel or other items on their bucket lists during their early retirement years. So, ensure to leave wiggle room when estimating your needs.

3. Risk tolerance
This is how much loss you're willing to take within your portfolio, and it depends on several factors, including financial goals, income, and age. A successful retirement strategy requires a well-balanced portfolio that balances risk tolerance and returns aspirations.
Identifying the extent of risk you're willing to accept to reach your desired outcomes is vital. Additionally, allocating a portion of your savings to secure treasury bonds to support essential expenses is advisable.

4. After-tax returns
To determine the viability of your retirement portfolio, it's important to calculate the after-tax rate of return once the time frame and spending needs have been established.
Anticipating a return rate greater than 10% (pre-tax) is generally considered unrealistic, even with long-term investing. However, this threshold decreases as you age due to a shift towards low-yield, low-risk securities.
So, it's crucial to account for how investment returns may be taxed, as the actual rate of return must be calculated based on post-tax figures. As such, determining your tax status before withdrawing from retirement accounts is essential to retirement planning.

5. Estate planning
Incorporating estate and legacy planning is another crucial aspect. This involves seeking the expertise of specialised professionals such as lawyers and accountants, and having proper life insurance coverage to secure the financial stability of your loved ones in the event of your passing.
Additionally, tax planning plays a vital role in the estate planning process. So, carefully consider the tax implications of gifting or transferring assets through the estate when leaving assets to family members or charitable organisations.

Investment and retirement planning
Investment and retirement planning in Malaysia is a crucial aspect of financial planning for individuals. This is especially with the ever-increasing cost of living and uncertainty surrounding government support for retirement.

An early start, coupled with making intelligent investments, can help you achieve a comfortable post-retirement lifestyle. One of Malaysia's most common investment options is mutual funds, which provide a diverse range of investment opportunities and the benefit of professional management.

Additionally, many Malaysians may invest in stocks, bonds, and property to diversify their investment portfolios and increase returns.

Another viable option is Prudential's PRURetirement Growth plan. This is an investment-linked plan for a fulfilling retirement. It pays you higher guaranteed returns and allows flexible withdrawals. It also pays your loved ones up to 125% of your coverage or the value of your investment fund if you are disabled or unfortunately pass away due to illness.

When to start planning for retirement?
Beginning your retirement planning journey at an early age is advisable because it provides a longer timeframe for your savings and investments to grow and meet your financial goals.

Starting the planning process in your 20s or 30s allows you to leverage the benefits of compound interest and increase your chances of achieving your desired outcomes.

How does inflation affect retirement planning?
Inflation can erode the purchasing power of one's savings, making it harder for retirees to maintain their standard of living, especially if relying on fixed sources of income like pensions.

For instance, if the inflation rate is 3% per year and one retires with an annual fixed income of RM50,000, after ten years, the value of the same amount of money in today's dollars would be reduced to RM38,931.

To counterbalance the effects of inflation, it's crucial to have a balanced retirement portfolio comprising both inflation-hedging investment and stable fixed-income sources.

Regularly reviewing and updating the plan to factor in changes in the inflation rate is also recommended.

Retirement planning mistakes to avoid

1. Not having a goal
A goal gives direction and purpose. If your goal is well-defined, you can avoid having a poorly planned portfolio that might not show you the desired yield by the time you retire.

2. Not reviewing the retirement plan
It's important to regularly reevaluate and adjust your retirement plan, considering changes in your life and the performance of your assets. This should be done at least once a year and more frequently when significant life events occur.
By staying informed and proactive, you can optimise your retirement investments and ensure they align with your goals.

3. Not diversifying your portfolio
All investments are risky, albeit to varying degrees. Therefore, you must diversify your retirement investments lest you lose everything in case one investment goes wrong.

4. Underestimating healthcare costs
Including insurance products in your retirement plan is crucial as they provide financial stability and mitigate health-related risks. A comprehensive medical insurance plan not only offers protection but also reduces the risk of using your savings to pay for unexpected medical expenses.

5. Failing to understand investment risks and challenges
Be careful with investment choices to ensure long-term financial security. For example, while investing in properties can provide passive income or potential capital gains, it may also come with the challenge of long-term financing, potentially decreasing retirement fund contributions.

It's also crucial to consider the impact of inflation and economic conditions, such as downturns and recessions in the financial markets. These factors can increase costs, lower the value of your savings and assets, and compromise your standard of living during retirement.

Conclusion
Effective retirement planning requires careful consideration of multiple factors, including the management of investments, insurance coverage, and long-term financial goals.

Stay informed and updated on market trends, account for the effects of inflation and economic conditions, and regularly review your plan - you’ll increase your chances of achieving a comfortable and secure retirement.