ARE YOU PREPARED TO RETIRE?
The importance of investing for retirement
“Young adults investing early in their lives are something that we have been focusing on as well. We want to educate young adults, and kick-start them to invest at a very early stage in life. Personally, I don’t believe in pension plans, retirement plans, and saving plans,” said Millionaire Investment Group Network International (MIG) chief executive officer Dato’ Brian Wee.
Wee stated, “If we immersed ourselves only in conventional investment schemes, which include fixed deposits, some mutual funds and pension plans, they will not sustain us over the long haul. If we are going to retire by the age of 60, most likely we will use up our retirement funds by the age of 65.”
That is why you see people in their 60’s and 65’s going out to search for job opportunities because they have used up their retirement funds.
“So what happens is, property prices over the past six or seven years have been able to deliver about 10 to 20% annual appreciation in Malaysia, but I am going to state it clearly and strongly, this is not sustainable growth. Meaning to say that properties will not grow at the rate of 10%, 15% or even 20% per annum over the next 20 years,” said Wee.
In other words, you need to source for something that is sustainable, which is logical when it comes to demand and supply. He further stated, “Only then, will your investment be able to sustain you beyond your retirement age.”
He emphasised that investing early is a must—it is a pre-requisite for one to enjoy a healthy and fun retirement.
“To invest in real estate for retirement, aspiring and seasonal Malaysian investors need wisdom for them to begin doing the right thing. This means mixing with the right group of people, at the right time, together at the right location,” said Wee.
Wee stated that Malaysia might not be the ultimate destination, therefore we are to spread and manage our portfolios in a healthy manner, rather than place our money in an organisation that gives us petty returns during bull years, and makes us absorb our own losses during the bear year.
“That is not how things should be done, we (MIG) believe in controlling our own destiny, which ultimately means moving forward for Malaysians who want to invest and who want to retire young and rich,” added Wee.
Previously, MIG had done some seminars on property investment. “I think as a whole, Malaysians need to be equipped not just with knowledge of property investing, but also all the way down to identifying economic policies and understanding interest rates, because all this makes up the wisdom of a real investor,” pointed Wee.
He elaborated that sometimes it is a go or a no-go in property investment. One needs to make the right decision. “You don’t have to be buying or selling properties all the time.”
The value of the Ringgit is failing, and Bank Negara is expecting inflation to rise by 4%-5% this year, partially because of factors such as the rationalisation of subsidies in Malaysia. At the same time, the world oil price fluctuation is causing uncertainty among investors and commoners alike.
As of 2014, Malaysia has a population of 30,073,353. A majority of Malaysians are between the ages of 25-54 years old, constituting 41.2% of the total population.
This age group typically falls under the work force category. A total of 13.1% of the population is under the senior category of those aged 55 and above.
“Things are getting more expensive” is the common tone you hear from the ordinary man on the street, when in actual fact, inflation has caused the value of our Ringgit to become smaller.
What is even more worrying is that Malaysians are not saving enough or do not have the necessary funds available to cover for their retirement.
According to Manulife, there are three key determinants of retirement duration. They are, the retirement age, life expectancy and marital status.
The official retirement age across Asia ranges between 50 to 65 years old. For women, it is even mandatory to retire by age 55 in China. In Malaysia, the minimum age to retire is 60 years old.
With average lifespans across the region increasing and retirement ages remaining flat or creeping up only slowly, an ever-increasing portion of an individual’s lifespan is being spent in financial deficit where consumption is exceeding labour income.
While the financial deficit experienced during childhood is largely funded by parents, the elderly must fund that deficit via a combination of the five key components of retirement income identified by Manulife in the Aging Asia report titled ‘Asset rich, income poor’:
- Salaries and wages, such as delaying retirement or holding a full- or part-time job in retirement
- Government social spending in public healthcare
- Pension benefits
- Family financial support
- Income arising from household wealth such as investment income or drawing down savings
As the length of time elderly individuals spend in financial deficit extends, the quantum of the deficit is growing thanks to inflation and an increasing strain is being placed on these income sources, often significantly exacerbating longevity risk.
Life Expectancy and economic development
The second core driver of retirement duration is life expectancy, which is rising in much of the world due to improving healthcare, better nutrition, and higher standards of living. Longevity in Asia has increased particularly quickly, albeit from a low base.
From 1950 to 2010, average life expectancy at birth increased by 22 years on a global basis and by 28 years in Asia.
Longevity improvement has been uneven across genders. While the male-female life expectancy gap has been narrowing in much of the world, this has not been the case in Asia, where life expectancy has generally improved more rapidly for females than males.
In the 1950s, Asia’s male-female life expectancy gap was less than a year, but by 2010, this had widened to almost four years.
Modest levels of economic progress for developing countries and territories can have an outsized impact on longevity, but in more developed economies further gains in economic attainment have a diminishing effect.
One factor that helps explain widely-diverging life expectancies across Asia is the relatively high correlation between economic attainment and longevity – our calculations reveal a 66% positive correlation between per-capita GDP in purchasing power parity (PPP) terms and a country’s life expectancy at birth.
According to the UN, Asia’s male-female life expectancy gap is not expected to widen much further in the coming decades, suggesting that the challenges posed by divergent life expectancies are likely to be contained.
However, the existing gap – combined with the fact that husbands are often older than their wives – means that female retirement can last an average of a decade longer than male retirement.
This poses a potentially significant challenge to governments across the region, as widows are often the least secure from a retirement income perspective and could place significant fiscal stress on government budgets.
The average life expectancy of Malaysians according to the CIA World Factbook is 74.52 years old. Malaysian men live to an average age of 71.74 years, while Malaysians females live to an average age of 77.48 years.
The third core input to our retirement duration analysis is marital status. The fact that the vast majority of Asians entering retirement do so as part of a married couple influences retirement duration in two key ways.
First, and most critically, married couples cannot consider individual longevity when assessing their retirement duration.
They must instead consider the very real likelihood that one may outlive the other by a potentially significant margin, meaning that it is the joint life expectancy of husband and wife that is relevant to retirement planning.
Second, as mentioned above, because females typically live longer than males and are often younger than their husbands, it is highly likely that they will experience far longer retirements.
Thus, while being mindful that the institution of marriage is changing rapidly in Asia, the analysis of longevity risk focuses on married couples.
In fact, it is believed that many governments in the region do not provide European-style financial support for households as they do not want to undercut this social support network.
In developed Western society, the institution of marriage has been diminishing for some time, as divorce rates have risen and the number of children born out of wedlock has increased.
As populations in Asia have urbanised and female labour participation has increased, the region has begun to see similar changes.
Save for China, which has actually seen an increase in marriage, almost every Asian economy has seen marriage levels fall, with the largest declines occurring in the most economically accomplished economies.
As these trends are taking root, we expect a growing proportion of the elderly in Asia to enter retirement unmarried.
Malaysia has roughly the same life expectancy at birth as China, but research suggests that Malaysians attach far less importance to retirement as a financial objective.
This attitude is influenced by the fact that a high proportion of Malaysians expect to receive financial support from their adult children during their retirement years.
This, combined with a low official retirement age which was only recently raised from 55 to 60, is no doubt a key reason why Malaysians leave the labour market relatively early.
Accordingly, Manulife considers Malaysia to be facing a relatively high degree of longevity risk—only time will tell whether the new, higher mandatory retirement age will contribute to changing retirement behaviour and lessen the degree of risk.
Rapidly aging populations represent a challenge to governments, households and financial institutions across Asia from the perspective of retirement income security.
This challenge is significantly aggravated by the fact that life expectancy is improving in the region, retirement ages remain generally low and marriage patterns are beginning to mirror those in the West where Asians are now marrying later in life, and having fewer children.
The situation is further aggravated by the fact that households in the region do not fully appreciate the potential duration of their retirements and thus tend to exacerbate longevity risk by not saving enough to cover their extended periods of financial deficit.
This disconnect is magnified for married couples, which are significantly underestimating their potential retirement duration if they base their calculations on single rather than joint life expectancy.
Retirement planning should be based on significantly longer retirement duration expectations than the averages that most households currently rely on.
What can we do to invest?
There are several key ways that households can enhance their retirement income security and decrease their degree of longevity risk.
These include efficiently deploying household financial wealth, and extending labour force participation into retirement.
According to Allianz International Pensions senior economist Renate Finke, “We have to expect that our customers and employees will get older. Key focus areas will be around financial preparedness, long-term care and the trend that family systems tend to be weaker.”
Finke stated that in Europe, old age homes for pensioners in need of long-term care and day-to-day services are growing very fast.
“The integration of pensioners into the workforce is another phenomenon, which is a win-win situation for retirees who are still active and also for companies. Leisure industries like travel will need to prepare for this new opportunity and growing target group,” shared Finke.
“They should review their planning process after certain periods, for example, every five years, or when major changes in life happen, like getting a new job, marriage, birth of a child, when their children go to school/college or when they want to purchase a property,” said Finke.
Finke’s advice was to educate Malaysians to start as early as possible for their retirement savings and also to have savings plans in place until their retirement age.
She said that so far, most Malaysians still think in shorter terms and are not yet really aware of their financial needs for their retirement.
MRTA & MLTA
One way to protect our loved ones and ensure they will have a roof over their heads is by insuring our homes.
Why do you need to insure home loans? Well, most importantly, it is to pay off your loan in the unfortunate event that you can no longer settle the loan instalments. This is normally due to death and permanent disability.
Insuring home loans will be vital to protect your family from losing their home to credit collectors when you pass on. Mortgage insurance, like any kind of insurance, also comes in different types.
Presently in Malaysia, one can either subscribe to the Mortgage Reducing Term Assurance (MRTA) or the Mortgage Level Term Assurance (MLTA).
MRTA would be suitable for buyers who aim to own a house in a longer-term, while buyers who are expecting to sell a house in the short-term are more suitable for MLTA.
Most home owners and home buyers buy MRTA for protection purposes while they buy MLTA not just for protection, but also for the purposes of savings or cash value.
This is because MRTA coverage covers the outstanding housing loan on a decreasing sum assured basis while MLTA covers the outstanding housing loan on a fixed level sum assured basis.
MRTA’s premium is either a lump sum payment by cash, or is financed into the housing loan, while MLTA is paid periodically on a monthly, quarterly, semi-annually, or annual basis. Therefore, the MRTA’s premium is lower than the premium paid for MLTA.
MRTA is not transferable and the bank is the beneficiary. On the other hand, MLTA is transferable and anyone can be the beneficiary.
Investing plays an important role in retirement, and people need to take this seriously in order to enjoy their golden years.
“In Malaysia, people need to aim at reaching an adequate replacement rate of their former income. They need support in planning and understanding what lifelong income they can get from their accumulated assets,” commented Finke.
“This is increasingly important as preparing for retirement is becoming ever more complex. Effects of inflation, increasing life expectancy, changing family structures, and health issues at older ages, all have to be taken into account,” opined Finke.
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