Posted on 17 November 2011 - 02:18pm
PEOPLE want to be able to spend their golden years comfortably, but often underestimate the many complex issues related to retirement, which often go beyond the financial.
Tan Beng Wah, chief executive officer of CIMB Wealth Advisors Bhd (CWA), spoke to theSunrecently about what retirement means in today’s world. His first observation is that most people are underprepared for retirement, due to several misconceptions, or ‘disconnects’.
“If you look at the current environment, there are some fundamental disconnects,” he said. “As you progress in life, most people generally improve in terms of their income, whether they are businessmen or employees; by the time you retire, your income is much higher, and therefore, you will be enjoying a different lifestyle.
“You would hope that when you retire, you will be able to enjoy a similar sort of lifestyle, but unfortunately, most people’s retirement savings is from the EPF, which is a proportion of their income.”
Very few people think about having alternate forms of retirement funds, and although more people are beginning to realise they should have additional savings, they tend to have unrealistic expectations about the amount they need to keep aside in order to retire comfortably.
“Let’s say someone thinks they can retire on RM5,000 a month in Kuala Lumpur,” Tan said. “Okay, but if this person is 30, and wants to retire at 40; that’s 10 years from now. Then you ask them how much they are willing to put aside every month for their retirement fund, and it turns out to be RM500.
“RM500 must transform into RM5,000 a month within 10 years. Can you see the problem there?”
While this is an extreme example, it does embody the attitude of many people out there.
Tan also says people rely too much on their EPF savings, not realising that they will probably outlive their savings. “EPF was set up in 1951 when the average lifespan was 55 years, meaning that you retire, and then you would have money to live comfortably for a few more years.
“Today, our lifespan average is 75 years for men, 79 for women. Hence, the savings that you have should be enough to accommodate another 20 to 25 years of living, which is where the reality is. It’s a huge problem.”
The youth mindset
The reason for the disconnect, according to Tan, is easy to pinpoint. “It’s the fault of the parents!” he exclaims. “Even children of today who don’t come from very high income families have never wanted, have never gone hungry. Whatever they want, they will get.”
Because of this, not many young people today understand the value of savings and often do not have any.
“We’ve created a generation of children that are not very independent, and who expect to be taken care of. It’s the fault of the parents, not the children. They were brought up in that environment and therefore they don’t think of their future.”
This sort of mindset often makes it challenging to get young people to understand that they have to save first before they can start spending.
The rising cost of living and currency inflation have also contributed to money losing its value compared to one generation ago.
“Take someone earning a salary of RM3,000. You ask them to save 10%, that’s RM300, it’s a huge sacrifice for them. But if you look at it, what can that RM300 buy today? So they get very discouraged. But nevertheless, the reality is that if you don’t save that RM300, you won’t save anything.”
According to Tan, a good rule of thumb is that people should have at least six months’ salary in savings. Anything beyond that, they can begin to look into investments to grow their wealth.
“There are so many ways excess cash can be invested, in order to grow their wealth for the future,” Tan says. “The issue is, how much risk is a person willing to take. But in general, young people can take more risks.
“And as to how much a person should set aside for investment, it’s entirely what they are willing to put aside.
This is what we call ‘opportunity costs’; if I invest or save this amount, then I’m giving up the opportunity to spend it on something else.”
Important questions
There are several important questions to be asked when people want to determine how much they need to retire.
Firstly, when do they want to retire? For some people, it might be at age 55, while others want to retire at 40, or believe they can work until they are 60.
However, they should also consider the second question: how long do they expect to live after their retirement? They will need to be able to support themselves during those interim years using their retirement fund.
Thirdly, what sort of lifestyle do they want to lead after retirement? Most want to be able to enjoy themselves fully, travelling the world or pursuing their lifelong interests.
But they should also consider other issues, including their health and their social network of friends.
To Tan, the most important aspect of planning for retirement is going beyond the numbers. “This country has a lot of problems when dealing with retirement,” he said.
“Retirement and ageing go beyond money. The qualitative and quantitative have to be considered together. You can’t just talk about the material aspects, and not talk about the social aspects and quality of life.
“I wish that people talked more about these kind of things, and not just ask about the numbers.”
