The blunders of middle-class retirement planning


IN MY work as an independent financial advisor, I often meet families and individuals surprised by the state of their retirement funds as they approach their golden years.

Despite the many financial planning resources available, many are left shocked, caught off guard, and unsure of what to do to get closer to their retirement financial goals.

Interestingly, the inability to plan for or support oneself in retirement is not confined only to those with lower earning capacity. The upper middle class (who earn around RM500,000 a year) are equally affected

In fact, the huge withdrawals from the Employees Provident Fund (EPF) caused by Covid over the past two years have left an irreparable impact on the savings of its contributors. According to the EPF, only 3% of contributors can afford to retire.

The question is, why are many middle-class people caught off guard when it comes to planning for retirement?

Similarly, why are there high-income households that can’t seem to get closer to their retirement goals, while there are other low-income individuals and households that seem able to?

This goes to show that success in planning for retirement does not always depend on the size of one’s salary.

Many factors (in play) lead to the success of your retirement planning. I’ve identified some of the most common retirement pitfalls:

> Not starting early enough

Unless you’re living under a rock, putting money aside in your savings isn’t enough to help you grow your wealth.

To reach your retirement goals, you need to invest some of those savings. When it comes to investing, time is always an important factor.

The effect of compound interest is often underestimated, but makes a huge difference in wealth accumulation.

When you start investing early for your retirement, you actually save time to accrue interest on your investments.

Take the example of Alex putting RM100,000 into an investment portfolio that consistently delivers an annual return of 8%, with the intention of withdrawing it when he turns 60.

If Alex starts doing this at age 45, he will actually have 15 years to accumulate the investment. He will have a total of RM317,000 at the age of 60.

On the other hand, if he starts earlier at age 30, he will have double the time to capitalize the investment.

On withdrawal, the investment will be worth well over RM1mil in value – that’s more than triple the amount on the same capital if he were to invest at age 45 instead.

Plus, investing early also means you have more time to fix any underperforming investments you make. A greater margin of error means you are able to invest in more volatile funds that have potentially higher returns (and higher risks), thereby increasing the potential for your returns.

The later you start investing, the more conservative and secure your investment portfolios need to be, limiting your potential return.

> Do not take inflation into account in the calculation

If there is one thing certain for the future, it is inflation. Whether you like it or not, the cost of living will go up.

Take for example; you now have over RM2mil in assets. Thinking that it will be a nice sum for your retirement, you don’t do anything about it.

But in a few decades, and thanks to inflation, RM2mil today might only be the equivalent of RM500,000 in the future.

Therefore, any retirement wealth planning that ignores the impact of the rate of inflation is unrealistic and doomed to failure.

> Not being holistic in your approach

Most of us have more than one aspiration for the future. For example, we want to be able to own a comfortable home, a car, raise our children comfortably and provide them with the best possible education and enjoy a comfortable retirement life.

Although we may have a rough idea of ​​what we can and cannot afford, the question remains: can we afford all of this?

I would say that one of the biggest flaws in retirement planning is the inability to see how one’s financial decision will impact another. For example, if you need to buy a comfortable house now, will you have enough money to afford your child the best possible college education when he turns 18 in five years?

The best higher education has a price, and a high price too. It’s not so much about whether you can afford it, but more about how a choice like this will impact your long-term retirement planning. Without forethought and holistic financial planning, many parents may end up having to retire later than expected or, worse, depending on their children once their retirement funds run out.

When we look at our financial roadmap, we need to look at it holistically, taking into account different financial goals, timelines, and cash flows.

Many Malaysians don’t use a holistic financial planning tool like iWealth to assess how major financial goals like buying a nice house or unexpected medical expenses are affecting their retirement planning.

From a professional point of view, these financial goals should not be achieved at the expense of your own retirement.

> Pay all your loans before retirement

Many people mistakenly think that you should start your golden age retirement with a “clean slate”, without any debt haunting you. While it’s best to keep your outstanding loans manageable, it’s not necessarily a good idea to wipe out all your debt before you retire.

Contrary to popular belief, it’s a good idea to keep some lines of credit open to take advantage of the availability of cheap money or low interest loans to optimize your cash flow.

If you pay off all your loans, it will be very difficult to apply for new lines of credit once you retire without a documented source of income.

As a guideline, a healthy level of debt to assets should not exceed 50%; while 30% or less is ideal. If you have a debt ratio higher than this, it’s time to examine your portfolio to see how you can reduce it. Perhaps selling a property that isn’t bringing in decent rental income might be a good place to start.

> Not maximizing your hard earned money

Investing for wealth is really about analyzing and optimizing the money you currently have to perform at their best.

This is overlooked by most Malaysians, causing them to lose an opportunity to make their money grow even more.

Here are more examples of financial blunders that do nothing to grow our hard-earned money:

> Leaving an underperforming mutual fund or loss-making stocks inactive

> Do not use FPE money to invest in higher yielding investments

> Not having time to invest idle money due to a demanding work schedule

> Buying the wrong type of insurance plan

> Paying high sales fees on investments, thereby decreasing its units and potential returns

Ironically, each of these mistakes alone is not enough to prevent you from achieving your financial goals.

However, when combined and compounded over time, these small mistakes could cost the average middle-class Malaysian a staggering loss of RM1.5 million to RM3 million.

That in itself could prove to be the deciding factor in whether or not the average middle class achieves the comfortable retirement it has always wanted.

In conclusion, over the past two decades of our consulting experience, these are just some of the most common mistakes we have encountered from our clients. As you may have observed, some of these mistakes stem from unconsciousness, while others stem from a lack of timely action.

As we enter the first quarter of 2022, it might be a good opportunity to take advantage of the fresh start to press the pause button and review our financial objectives in a comprehensive way. If anything, make it a point to make all the necessary adjustments before you lose another year of opportunities for the business of life.

Yap Ming Hui is a Certified Financial Planner. The opinions expressed here are those of the author. Any reliance you place on the information shared is therefore strictly at your own risk.

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