THE question, “when should one plan for one’s retirement?” is often asked.
It is one of the most important questions that needs to be addressed, and taken seriously, because it has to do with one being in an uncomfortable situation where the possibility of constant income and cash flow is no longer a norm.
To be frank, there’s no hard and fast rule on this. I would urge my client to always begin with the end in mind. Once that context is set, we can safely move along its confines.
Nevertheless, if you have no concept of the end – then let’s come at it from a viewpoint of retirement planning from each stage of your life-cycle.
Long-term accumulation stage (starting age 20-30)
Intelligent investing is the key to build wealth. In other words, when saving for retirement, you would want to put all your extra money into investments.
The long-term accumulation stage starts when you begin to invest for retirement purposes. It’s a commitment that will take you until you are five to 10 years from your intended retirement age. Because it is such a long process, it is important that you identify your risk tolerance, and choose the appropriate investment vehicles to match your risk profile.
As you progress from this stage, you would need to regularly keep an eye on your investment portfolio and adjust it according to any changes in circumstances.
Ideally, the long-term accumulation period should start as early as possible because you have time on your side. Compared with someone who is about to cash out his EPF, you still have many active income earning years behind you, and with that, the opportunity to alter your saving habit should you incur losses in your investments.
In fact, when you are young, you can afford to take greater investment risks. Take the opportunity to amass as much retirement assets when you can still afford to do it.
Care should be exercised when designing an investment portfolio at this stage. Just because you can afford more risks doesn’t mean you should take your chances. A balance needs to be struck between meeting your risk tolerance and fulfilling your retirement fund objective.
If a risk-averse person were to implement an extremely conservative investment portfolio, chances are that he or she may not be able to meet his retirement objective. Why? Enter, inflation. Never let it sneak up on you!
Inflation is a silent thief that will eat away and reduce the purchasing power of the monies put into your investment vehicles. As such, if your investment vehicle fails to generate higher returns, or sufficient appreciation to offset the effects of inflation, you would have effectively “lost” money. In other words, your money is not growing fast enough.
Therefore, for the sake of having a decent chance at retiring comfortably, even the most risk-averse person should consider taking on more risk by investing into investment vehicles that yields higher returns.
Portfolio restructuring stage (starting age 40-55)
The time to restructure an investment portfolio varies depending on the individual. In most cases, the portfolio restructuring stage starts somewhere between five to 10 years from the retirement age.
As the date of your planned retirement draws closer, you should fine-tune yourself to become less growth oriented and more risk averse.
It’s a bit ironic. When you are young, you have time on your side to stomach any side effects from ill ventures. But when you are almost at the finishing line, you don’t have the leisure of time to recover from any losses, let alone deal with major losses from investing in high risk investments. Therefore, it is only natural for you to be less willing to invest additional savings into high risk investments.
Meanwhile, it doesn’t make sense to continue to maintain an outdated investment portfolio that you have put together when you were in your 20s and 30s, as it no longer reflect your current situation.
The process of adjusting your investment portfolio, will lead you to owning a restructured portfolio that has significantly less risks than the ones held during the long term accumulation stage. As a result, your investments will experience smaller capital appreciation.
Therefore, as you approach your planned retirement age, you should expect a tapering off your total returns. This ‘recommended’ progression would have been perfect, had you made an advance attempt to invest and set aside money for your retirement (especially if you had started early during the long term accumulation stage). It gets very challenging, if you are already close to retirement age and have very little to show. It would be nothing short of a miracle - You will need to dramatically increase your annual savings and find ways to increase the return from your savings immediately from now. If necessary you may want to consider delaying your retirement.
Fortunately for most people who start their career and family at a reasonably early age, the shift in investment emphasis and risk tolerance normally coincides with a reduction in their other financial commitments. They may have finished paying off their mortgages, car loan and funding for their children’s tertiary education. If you fall into this category, you can redirect what money you have leftover from the reduced financial commitments to increase your annual investment for retirement purpose.
Non-monetary wise, if you and your spouse are both drawing salaries, it is important to start discussion on an agreed date to depart from the workforce. You may want to explore the possibility of having one or the both of you retire earlier or at the same time.
Preservation and current income stage (age 60 and beyond)
This stage begins from the actual retirement age and continues well into your golden years. Your investment portfolio should shift gears to preserving your accumulated wealth. Another portfolio restructuring is in order to reflect your new risk tolerance level and the need to fund your retirement living expenses.
However, a portion of your total portfolio should still be allocated to offset the impact of inflation during the retirement years. As you can see, the threat of inflation never fully goes away. Make no mistake, those who choose to ignore this economic phenomenon will find this oversight a costly lesson.
There are certain financial planning disciplines that you may want to adhere while in your wealth preservation phase. Keep a proper system of recording to measure how much money you are spending and on what you are spending for. See how this lines up with your actual income, and where possible, make the necessary adjustments to your lifestyle so that your cashflow remains in the positive.
A comfortable and worry-free retirement do not just happen. There is always a serious risk that something unexpected will cause your plans to go awry. As such, common sense denotes that we should plan ahead and cover for every potential contingency. Perhaps you may get a a lower than expected investment return, or the sudden onset of a health issue may cause you to deviate from your careful retirement plan? You can withstand all these obstacles, if you have put in place the right measures in your retirement planning.
Here are some hacks that you can adopt to your retirement plan:
1. Have a proper financial plan – you can either pay a fee to get a professional to help you with it or, DIY yourself for free by using the iWealth mobile app. Without a plan, any actions taken would be equivalent to shooting in the dark.
2. Continue to invest, even well after your have retired. Many people make the mistake of cashing out on all their investments upon retirement. Bad mistake! One should always ensure that their retirement asset continue to grow optimally. This will buffer you from any unexpected turn of events, or even give you a better quality of life.
3. Refrain from settling all your house loan – You may never get another chance to apply for a loan due to your advanced age! If the interest rate is low, continue to serve the loan. Channel any additional income to investments that can generate higher returns.
4. If you have limited funds to service a medical insurance, ensure that your critical illness is insured based on your last drawn salary, and that your hospitalisation and surgical covers room and board for at least RM150 a day, and has a high annual limit.
5. Allocate at least 3 years of retirement living expenses as cash reserve that can be parked into some type of cash or cash related investment. Once a year top up the cash reserve using the profit or gain from your investment portfolio
Lastly, it is the time for you to enjoy yourself. You deserve it. After all, you have spent a good 1/3 of your ‘living’ years working to put food on the table, and ensuring that your dependents are well looked after. It is time you enjoy the fruits of your labour.
Yap Ming Hui (ymh@whitman.com.my) is thrilled that his mission to empower every Malaysian with a roadmap to financial freedom has finally come to fruition with the release of a free DIY roadmap to financial freedom tool on the iWealth mobile app. The views expressed here are solely that of the writer.