drNaz & his network of human beings

Did you read The Star last weekend? There were so many articles regarding retirement that kept some of my clients awake at night, full of worry. The main issue… “what you already have and will eventually have upon retirement might not be enough” especially for those who will retire in cities like KL, Penang or JB where the cost of living has gone up tremendously over the years.

In conjunction with that, I will try my best to compile all the articles regarding retirement, published by the star previously last weekend. 

Sunday May 27, 2007
MOST MALAYSIANS DO NOT HAVE FINANCIAL SECURITY

ONLY 5% of Malaysians are prepared for retirement. Despite a growing awareness for the need to prepare for one’s retirement, many do not translate their plans into action.

Those in their 20s think they are too young to think about retirement, while those in their 30s and 40s tend to believe they are doing enough because they have their EPF savings. By the time they are 55, it is just too late.

The sad truth is that at 55, most people cannot retire with financial security.

Based on EPF’s 2005 annual report, about 90% of EPF contributors have less than RM100,000 in their accounts – not enough to see them through 20 years past retirement.

COUNTING ON THE NEST EGG

By SHAHANAAZ HABIB

With people living longer, marrying and having children later and not saving enough, facing retirement is a challenge. While there is growing awareness about the need to plan, less than 5% are prepared for retirement and fail to take into consideration inflation rates and rising medical costs.

IN 1981, when Azman graduated, he got a job in KL which paid him RM1,800 a month. He bought an imported Mazda at RM17,000 and months later he put down money on a RM78,000 single-storey terrace house.

Today, 25 years later, Azman’s daughter has just finished university. Her starting pay is RM1,800, just like her father’s two and a half decades ago.

Long road ahead: With the life expectancy of men at 72 and women at 76, most people have a good 20 years to live after retirement.

But unlike her father’s time, imported cars cost over RM100,000 today. So Latifah has opted to buy a Proton for RM45,000 (more than double what her dad paid for his first car).

While her father could afford to buy a house early in his career, Latifah can’t. Houses in KL these days cost at least RM200,000, so she has to work for a few years first before she can own one.

Compared to 25 years ago, the prices of goods, food, petrol and electricity have all gone up. Understandably, it’s an uphill task for Latifah to save on her RM1,800 salary, since the purchasing power of her salary is much lower than her father’s back in the 1980s.

It is a fact that wages have not moved in tandem with the rise of the cost of living and inflation. That trend is expected to continue.

And if people do not start planning early for their retirement, they are going to find themselves in a spot after they turn 55.

Today, three meals cost you RM20 but in 20 years time – with an inflation rate of 6% a year – you will need RM64 per day for the three meals, estimates financial consultant Hazel Ong Archibald of CIMB Wealth Advisors (see Chart 1). The government puts inflation rate at 3.2% to 4.8% but Ong says in urban areas, that figure is about 6%.

So while the RM500,000 in your EPF or bank account at retirement might look good on paper, she says, if you do not invest that money to make it grow at a rate higher than the inflation rate, 20 years later, it would be worth only RM145,053 in purchasing power!

While there is more awareness about retirement planning these days, particularly in the urban areas, in reality this does not often translate into preparedness.

Why?

“Because it is more pleasurable to spend than to save,” opines Ong.

People understand – at head level – the need to plan and save, she says, but at heart level, emotions rule and instant gratification wins the battle.

“I wanted to persuade a friend to save for the future but she kept saying she had no money but then later I saw she could sign up RM3,000 and RM5,000 for some slimming packages!”

Reality hits when people find that they cannot afford to retire because they had not seriously put aside the money early on in life.

Ng: ‘Less than 5% are prepared for retirement’

“Less than 5% are prepared for retirement,” estimates Life Insurance Association of Malaysia (LIAM) president Ng Lian Lau.

He says those in their 20s think they are too young to think about retirement, while those in their 30s and 40s tend to believe they are doing enough because they have their EPF savings, and those who are 55 feel it is just too late for them.

And the truth is at 55, most people cannot afford to retire.

“People are living longer, life expectancy for women is 76 years. For men it’s 72. With this kind of longevity, people have got more than 20 years after retirement. 60 would be a more ideal retirement age,” he says.

People are marrying later too, points out Ong.

Which means they are having children later in life. If a person has a kid at the age of 35 and retires at 55, the odds are that his child at 20 would probably still be at university or college and his education require financing.

On average, the Malaysian household spent 5.7% on education last year. With the cost of education rising by 6% each year, this is expected to climb steadily.

While parents might buy an education insurance plan for their children, Ong has found that 90% of the time the amount is insufficient. More often than not, parents are willing to give up “everything”, including their own retirement fund for the kids. Which leaves them in a vulnerable position in their old age, unless of course their children provide for them.

As for life insurance, only 40% of Malaysians are covered. Ng says this is a small number compared to 100% in Singapore, 80% in the United States and 400% in Japan (where one person has four policies on average).

Ong: ‘Inflation rate in urban areas is 6%’

And even if one has a life policy as well as savings from the EPF, people should still worry about retirement. This is because without a new source of income, that money would run out. This is especially so if one runs into health problems which is common when people grow older.

“Medical inflation is easily 15% each year. And this could really eat into the savings,” warns Prudential Assurance Malaysia Bhd CEO Tan Kar Hor.

Tan likens the medical bill as a “hole” which if not plugged would leak away one’s entire retirement and savings.

“It’s only a question of how the big the hole is,” he says.

So parliamentary secretary to the Finance Ministry Datuk Seri Dr Hilmi Yahaya’s announcement on Thursday that amendments to the Employees Provident Fund Act would allow contributors to withdraw money to buy insurance for critical illness for themselves and their family is welcome news. The amendment Bill was passed in Dewan Negara that same day.

So how much would one need for retirement?

Experts say this depends on the individual and his lifestyle. And how much he is willing to reduce consumption – to eat out less often, buy fewer things, live in a smaller house, drive less, drive a smaller car and travel less.

The rule of the thumb, says Ng, is managing on 60% of your last drawn pay.

For Ong, it’s 70% of one’s current lifestyle. If a family in Kuala Lumpur with two kids and two cars needs RM5,000 today, at retirement, expenses should go down to RM3,500.

Even based on this calculation, one would need RM747,000 if one were to live for 25 years after retirement, and RM806,200 for the next 30 years, factoring in the inflation and interest rates.

Going by statistics revealed in EPF’s 2005 annual report, about 90% of EPF contributors have less than RM100,000 in their accounts. So sole dependence on one’s EPF savings as a safety net is not good enough.

Assuming that one can live on RM1,000 a month, to survive for 25 years, one would still need a substantial RM300,000 and for 35 years, RM420,000.

Bank Negara’s Counselling and Debt Management Agency (AKPK) CEO Mohamed Akwal Sultan reckons a person should not start purchasing big assets like property or a house late in life as the danger is that once they have retired they may not be able to meet the instalment payment on it.

“When you are in your late 40s, you should be winding down and not committing to high expenses to buy big things,” he says.

AKPK has dealt with a number of cases where retirees have had banks auction off their houses because they could not meet the monthly loan payment.

There is also the problem of credit card temptation. Ng notes a worrying trend that more and more younger people are becoming bankrupt as they are spending “tomorrow’s money”. Which basically means these people are not saving or building their retirement nest.

Ideally, Ong says, people should start saving from the time of conception; that way would be able to enjoy the magic of the compounding effect (see Chart 2).

Prudential’s Tan says a noticeable trend is that while the younger generation is prepared to invest in new financial instruments, the older generation gravitates towards fixed deposits.

“That is very risky because you would not be able to accumulate enough because the interest rates can’t meet the inflationary rate and your money is getting smaller,” he says.

He believes given the current life span, it would do retirees good to be more aggressive in their investment.

“In investing, you should not be looking at the date of retirement but rather the date of potential death which is probably still another 21 years away after retirement,” he says.

He recommends that people only keep about six months of their monthly expenses in the savings and FDs and put the rest in investment products that generate more income than the inflation rate.

Ng believes a good private pension would help people in their retirement years. In developed countries, money put into savings for retirement is not taxable, neither is the profit from that investment.

“When you retire, you can’t take the money out in a lump sum either or you’d have to pay tax on it. This will force you to withdraw your money on a regular monthly basis for retirement because that’s tax free,” he adds.

Singapore has such a scheme, the voluntary Supplementary Retirement Scheme, which complements the Central Provident Fund (CPF). Such a scheme has not taken off in Malaysia for a number of reasons, says Ng.

It would be a loss of revenue to the Government because people would not be paying taxes on money put aside for retirement. It would benefit only the rich and middle income group as the poor might not be able to afford it, he adds.

“Perhaps it hasn’t taken off too because the Malaysian economy is pretty dependent on consumer spending. And the Government wants you to spend,” he adds.

Ng says there should also be an asset liquidation law in the country. It is puzzling that there are all sorts of incentives for asset accumulation, he says, but none for liquidation.

An example of asset liquidation would be to reverse mortgage your house to the bank in return for a guaranteed monthly income until you die.

The asset would at the end of the day belong to the bank or insurance company. But in the meantime, the person has the right to continue to live in the house until death and get a monthly income too.

“If they outlive the value of the house, the bank loses,” he says.

As our population ages and life expectancy increases, more thought must be given by both individuals and the Government on how to develop a culture of planning and saving for one’s retirement.

Next week: Sunday Star looks at the plight of over 46,000 pensioners who retire on an income of below RM500 or even less than 200. We welcome feedback at sunday@thestar.com.my 

GOOD NEWS FOR SOME, NOT GOOD ENOUGH

Good news for some, not good enough for others

Bahron Amzah, 34, Fireman (pic)

“ALL government servants have been waiting for this pay rise for a very long time. The cost of living in the city is very high while the price of fuel and goods is rising. For me though, the priority is to purchase my dream house. I have been waiting for a few years to do so and have been looking around, but I could not afford it.

“With my previous pay, I could only obtain a government loan of RM96,000, enough to purchase a flat. However, now I can obtain a loan of RM156,000 which would enable me to buy a house. It would be more comfortable as my child will have space to run around and I will have space to park my car.

“I have to thank the government for looking into the needs of the government servants. Having said that, our commitment to the government should be there and the quality of service should improve.”

Lum Kin Tuck, 90, president of the National Council of Senior Citizens Organisations Malaysia.

Lum believes that pensioners should be given a 100% increase – but only those who are in the lower income group. “I feel that most pensioners are not happy with the rise of 30%. A big group of pensioners such as those from the army and police are from the lower income group, and they are getting only RM200-RM300 a month.

“It was tough for them to survive with their salaries when they were working, but the pensions are even worse – far below the poverty level.

“When some of these people retire, they find it difficult to work in the private sector because they are not used it. How are they supposed to survive?”

Lum himself receives a pension just over RM1,000, which has not increased significantly since his first drawn amount of about RM700.

“30 years ago, things were cheap and I could lead a very decent life. For example, a car only cost RM4,000 then. But with inflation over the years, the purchasing power of my pension today is about RM200. That is why I am fighting for the lower income group.

“I think pensioners should be entitled to some monthly cost of living allowance, especially those living in Kuala Lumpur. Those in smaller towns can get by with less money.”

Lum feels that the past contribution of pensioners to the building of the nation should not be forgotten.

“We played a big role in the development of the country. Now that we are old, they don’t care about us. This is not fair, our service to the nation should be recognised.”

Johnny Wong, 43, a primary schoolteacher.

Wong is in the second highest salary tier and will be receiving a 15% increase in salary.

“Oh yes, of course we are happy with the increase. It means a lot to my family and me, even though it is only a few hundred ringgit. It can still make a lot of difference when it comes to buying foodstuff and daily expenses.”

When asked if he is satisfied with the quantum of increase, he says: “The increase is not that large, and I think that it is not enough – but at least it is better than none at all.”

“In my opinion, if we were not staying in Kuala Lumpur, the money would stretch further. The government has given us what they feel is right and we are appreciative for it.”

 

S.M. Mohamed Idris, Consumers Association of Penang (CAP) president

While the payrise for government servants is justified, there are concerns that unscrupulous traders will raise the price of goods.

“The pay rise is long overdue for those in the lower categories who have constantly found it a struggle to make ends meet on their meagre salary. However, we are concerned that retailers will take advantage of the pay rise to increase prices,” says Mohamed Idris.

Price increases are likely to be seen in foodstuff and household goods such as furniture and electronic products.

“Prices are going to increase across the board and the private sector workers will be at a disadvantage due to inflation.”

He is also concerned that civil servants would start buying more goods on credit and get themselves deeper into debt.

“Civil servants are popular targets of retailers because monthly repayments are guaranteed as Angkasa (National Co-Operative Organisation of Malaysia) will carry out salary deductions.” – BY RASHVINJEET S.BEDI and JOSEPH LOH 

PHASED EPF WITHDRAWALS A BETTER OPTION

By SHAHANAAZ HABIB

“IF WE were to start EPF all over again, I think we should go for regular monthly payments like the pension scheme or phased withdrawals rather than having retirees take out their money in one lump sum,” says Rusma Ibrahim, the EPF deputy chief executive officer (organisational development and strategic planning).

Rusma: ‘The retirement age should be around 58 or 60’

Right now, 99.9% of the contributors withdraw their EPF savings in a lump sum once they reach 55.

And it is up to the contributors to manage that money. But sadly, EPF has found that contributors tend to go through that money rather quickly.

Their first survey shows that 70% of retirees use up all their EPF money within three years after retiring. A second survey done in 2004 shows them doing better – they managed to stretch their money up to 10 years.

But that might not be good enough given the fact that people tend to live a lot longer these days. In Malaysia, life expectancy for women is 76 years and for men 72 years, which means that after retirement they have to support another 20 years of living.

And on average, contributors have RM106,000 in their EPF account when they retire; and for a number of people the EPF is their only form of savings.

“If one reaches 55, the probability is he could live until 80 even up to 83. But you can’t stretch that RM100,000 for 30 years. It’s not possible,” says Rusma.

While the private sector is deemed to offer better salaries and perks and a lump sum in the EPF, ironically it is the civil servants who tend to have it better after retirement.

Their monthly pension, which is half their last drawn pay, assures them at least of a continuous source of income regardless of how long they live.

“A good pension scheme is one where there must be regular payment. The quantum will differ but at least you are guaranteed of something,” says Rusma.

An annuity-like scheme for EPF where retirees get monthly payments, she adds, would have “insured” people against the longevity risk “but we didn’t start off that way.”

But the EPF, she points out, is only one source of savings. Ideally, there should be a multi-pillar system where one can rely on other sources for retirement income.

“This is something there has been discussions on. The Government can provide the policy but the market has to respond by coming up with private pension or annuity schemes for those who can afford it,” she adds.

Another way is to continue working for as long as possible. Rusma believes 55 is much too early to retire given the fact that people are still active and productive at that age.

“Going by the life expectancy, the retirement age should be around 58 or 60. It would make a lot of difference accumulating savings for another five years.

“Even in developed countries, people are talking about how to make people remain in employment for as long as possible,” she adds.

In Malaysia, because of the extended family support system, parents tend to think that “worse comes to worse” their children will take care of them and tend not to look at retirement as a problem.

“But like it or not, this support system is breaking down because of lifestyle changes. People are getting married later and having fewer kids. The children may be working in the city and parents are back in kampung and this physical distance contributes to the problem,” she says.

Rusma points out that planning when to get married and when to have children too are part and parcel of financial planning as these impact on one’s retirement.

“Ideally, when you retire, you should have settled your liabilities. If you had planned properly, your house and car should have been paid up and your children should have finished their education and should have started working, otherwise they would be a burden on you.”

And with inflation and medical costs going up, Rusma cautions, holidays after retirement have to be sacrificed.

“That’s only for the well to do. That’s the reality. Of course all of us have dreams. I have that dream too to go off to South Africa after retirement. But can I afford it? That’s the reality.”

So her advice is for people to continue working as long as they can be productive, to stay healthy and to start saving from young to take care of the future.