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The 4 steps of effective financial planning for your retirement

Updated 28 Mar 2018 – By Caitlyn Ng


There’s a mindset most people have, which is that they will always have tomorrow. Or the day after that. It might explain why many people put off retirement planning until it’s too late, as proven by the worrying figures released by the Employee’s Provident Fund (EPF).

According to their calculations, a member who would like to retire by the age of 55 would need to have a minimum of RM228,000 in the accounts to finance basic retirement needs. However, did you know that as of 2015, only two thirds of EPF members aged 54 have RM50,000 or less in their accounts?

Don’t want to become a part of those troubling statistics? We’ve put together four key steps to effective financial planning so that you can be assured of a peaceful and worry-free retirement era, so read on!

Step 1: First year income as a rough benchmark

Ideally, you should start putting money away for your retirement as soon as you begin working, which is roughly in your 20s. When you’re making a plan, a term that is important to take note of is ‘present value’ (PV). Given an assumed rate of return, the PV gives you a rough idea of what you’re going to be needing in an account today, to meet your spending needs during retirement.

You’ll have a rough idea of whether you’re on track by comparing the PV with what you currently have saved, or what you think you’ll have saved by your retirement date:

PV = FV * (1+i)-n

Assume that you’d like to put money in an account today to make sure that you have a little extra during your retirement in 10 years. You’d like to have RM200,000 by that time in the form of future monthly benefit payments and you know that you can get 5% interest per annum from a savings account during that time. How much should you be putting in that account now? Based on the formula:

PV = 200,000 * (1+0.05)-10

     = 122,783

Thus, you’d need RM122,783 in your account right now to get the future value of RM200,000.

You may also want to consider having a lump sum payment in lieu of the monthly disbursements. This will be an attractive option to some because of the simple fact that it offers the receiver the flexibility to do as he/she wishes with the extra cash on hand. There’s always the option of investing it yourself, or if you have any balance of assets at the time of your death, you can leave them to your heirs for them to have a financial leg-up later on in their lives.

Step 2: Current available resources for retirement

The next step is to figure out how much current resources would actually provide you with a guaranteed retirement income. This includes sources like the Employees’ Provident Fund (EPF) as well as the Private Retirement Scheme (PRS).

The former, being a compulsory savings scheme that’s been implemented nation-wide for individuals, is more well-known. Both employees and employers in the Malaysian private sector are mandated by law to make a contribution to this retirement scheme that’s fully-funded and provides defined contributory-type benefits to its members.

As there’s a guaranteed dividend of 2.5% per annum, you can be assured that your money isn’t just sitting idly there. The good news is that it won’t be just 2.5% (as proven by the EPF’s success rate for the past ten years): they’ve been able to offer between 5-6% per annum!

The latter scheme is lesser known, but no less beneficial, for those looking to consider another savings option. In addition to there being a tax exemption of up to RM3,000 for contributors, those aged 20 to 30 years of age will enjoy a one-off RM1,000 incentive from the government for a minimum contribution of RM1,000 in PRS accounts. This is thanks to the Budget 2017, where RM165mil was allocated to the PRS Youth Scheme.

There are eight PRS providers you can select from, all of which are approved by the Securities Commission Malaysia. PRS differs from the EPF’s statutory minimum dividend since the returns are fully dependent on the stock market’s performance. This means that you have two options: to be well-researched in stocks and actively select the funds which your money goes into OR not choose a fund and allow your money to be invested based on the default option (the money will be allocated to the core PRS funds based on your age).

Step 3: Valuation of retirement resources' future value

The future value (FV) here refers to the amount of money that you would like to have for your sunset years. Even though you’ll have differing amounts and needs from everybody else, we’re sure nobody would say “no” to acquiring more cash! The main aim is to set a goal for the type of lifestyle that you want; will it be one with simple pleasures or one with luxurious travels?

The calculation is: FV = PV (1 + I) ^ N

For example, assuming that you have RM5,000 which you invest today for a period of ten years and with an interest rate of 8% per annum. To know how much you’ll be receiving down the road, the formula tells us this:

FV = RM5,000 (1 + 0.08)10

     = RM10,794.62

RM10,794 may not sound like much but it does give you a comfortable sum to use in times of financial emergencies.

Even though the above is extremely simplified, the formula is enough to clearly show us how to manage our retirement expectations. We cannot expect to have a large amount of money for our retirement if we do not do two things: put in the effort to start by investing the money we have today, as well as taking some calculated risks to gain higher returns.

Step 4: Determining if there is a retirement income gap

If you’re wondering what this gap means, it’s not referring to the space between your thighs. Rather, it's the gap between your funds saved up and the actual expenses incurred during retirement. You may have already taken the necessary steps to ensure you have enough, but there are two key factors which may cause your expenses to be thrown off-track: an increased lifespan and unexpected economic shifts.

The previous retirement planning steps – placing some money aside as well as elementary investing – allow you to begin setting the course to a neat little retirement nest egg. Using your existing strategies and savings rate, we can thus make an educated estimate for the growth trajectory of funds for your sunset years.

This is ‘gap analysis’ – the process of figuring out how to minimise that gap. You can figure out what changes need to be made now so that you can alter your current trajectory and reach your financial goals during retirement. It also puts your goal into perspective, whether it’s realistic or otherwise.

Since you cannot accurately predict what the future may hold, you can visualise a best and worst case scenario. In the former, you assume that you have good health, reasonable investment returns, low inflation and a strict budget. In the latter, you assume that there are several serious illnesses, below average investment returns, high inflation and unexpected costs.

To conclude

Develop an action plan after you’ve reviewed and analysed the various income strategies available to you. We've already listed down four; namely first year income as a rough benchmark, taking stock of current available resources for retirement, valuation of retirement resources’ future value, and determining if you're facing a retirement income gap. Either select one that you feel most comfortable working with, or utilise a few.

You wouldn’t want to be left battling a difficult financial situation in your golden years, not after you dreamt of that blissful retirement era all your working life! At the very least, you could opt to look for other income options that are beyond your standard bread-and-butter, such as using a personal loan to actually earn money.

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