The desire to maintain a certain standard of living is what drives many of us to put in long hours at the office. However, most of the time, we don't give much thought to how our lives will be when we are older. Have you started your retirement planning? Today I will be sharing 6 mistakes in retirement planning that we Malaysians should avoid at all costs. If you fail to prepare, be prepared to fail! You will regret not avoiding these mistakes now.
You absolutely require a retirement plan in order to achieve your goals of financial autonomy and the ability to enjoy everything that life has to offer. According to research conducted by the Asian Strategy & Leadership Institute, the majority of Malaysian households have no savings. Almost 90% of working Malaysians earn less than RM5,000 per month, and less than 50% of them are active EPF contributors (EPF). About 80% of the workers will not have sufficient funds to support themselves in retirement.
6 Mistakes in Retirement Planning for Malaysians
No thanks to the pandemic, even more Malaysians have depleted their EPF savings to the brink of emptiness. It is time to wake up or we will be wallowing in self-pity or under the bridge in the future. The key to success is having an effective retirement plan. Here are 6 retirement traps to avoid.
1. Failing To Prepare For Retirement
A lot of us do not take retirement planning seriously, thinking that we will have a lot of time until that very day. Hence, there is little to zero planning for our golden age. Taking a passive approach to retirement and underestimating your financial requirements is a risky proposition. According to estimates, many Malaysians exhaust their EPF savings within five years. What will you do when your finances run dry?
You must also keep in mind that the objective after retirement is to maintain or improve your standard of living. Without a strategy, you will encounter financial troubles and possibly place a significant strain on your family. Inflation and the rising cost of products and healthcare are other considerations that will increase your living expenses. A comprehensive strategy will assist you in reaching a worry-free retirement. You can start your retirement planning by calculating your anticipated monthly withdrawal during your retirement.
2. Starting Too Late in Retirement Planning
Unless you are a millionaire or you have huge impending inheritance, you need to start your retirement planning as soon as you can. Why wait until you're 55 to pursue your passion projects when you may retire as early as 35 and still have plenty of time? If you start putting money down for retirement at an early age, you will be able to retire earlier.
Two enchanted words, compound interest, are the key to unlocking the full potential of an early start to your savings plan. What does it mean when interest is compounded? The accrual of interest is what leads to additional interest.
If you put away RM10,000 in savings and your bank awards your interest at the rate of 3% per year, you would end the year with RM10,300 in your account. You will start to accumulate interest on your initial deposit of RM10,300 the next year, and by the end of that year, you would have a total of RM10,609.
Now, let us assume that you add RM1,000 to the same account on a monthly basis. You would have accumulated RM153,235 at the end of the decade if you saved consistently. You would only have RM130,000 if you did not receive compound interest on your investments. This indicates that you made a total of RM23,235 only through compound interest on your investments. Start calculating the interest you can earn right now!
It is recommended to start saving money when you are in your 20s since this gives you more time to allow compound interest to do its job. Putting your money away in the bank is not the only method to put compound interest to work for you; there are other options as well. You can consider other options for investing, such as unit trusts, which might provide you with a higher rate of return. Calculator.com.my is one of the many entertaining online tools that may assist you in planning your savings and investments; alternatively, you can consult with a reliable financial advisor.
3. No Diversification In Savings
This is a really serious blunder. Although it is the only source of retirement funds for a lot of people, the Employees Provident Fund (EPF) shouldn't be your only option. Even if it is expanding at a rate of roughly 6% per year, there are other opportunities that offer returns that are comparable to or even better than this one.
A suitable example of this would be private retirement schemes or other savings plans, unit trusts, real estate, high-interest fixed deposit accounts, or any other means of providing long-term, consistent, and competitive returns with a low level of risk. Still, remember the age-old adage of not putting all your eggs in one basket? Diversify when you can as you will never know what will happen to our EPF, right?
4. Withdrawing Your EPF Money Too Often
While your Account 1 is completely off-limits until retirement age, the EPF has made it feasible for you to access your Account 2 under certain conditions. You can withdraw funds for a down payment on a property, mortgage repayment, additional education, or unforeseen medical expenses. The pandemic has seen unprecedented withdrawals allowed for our EPF savings.
According to EPF, 73% of its active members and 84% of all members had insufficient funds, preventing them from affording even RM1,000 per month in retirement. Approximately fifty per cent of members, or six million Malaysians, have savings below RM10,000, while 2.6 million have less than RM1,000. This means we will have a lot of retired old folks living in poverty!
Never withdraw your savings from EPF unless it is totally necessary. If you have exhausted all other alternatives and really needed the extra cash, then make sure to replenish the money you have taken out later. If the savings withdrawn are not going to be used for investment, it will be wiser to leave it in the safeguard of EPF as you will get a guarantee of 5-7% in interest.
Instead, consider expanding your EPF funds. After the Basic Savings* in Account 1 have been set aside, the EPF permits members to withdraw up to 20% of their Account 1 to invest in EPF-approved unit trusts. To learn more, visit EPF's official website.
5. Spending All Bonuses Instead of Paying Up Debt
There is a widespread misconception that annual bonus money can be spent carelessly by recipients so long as they make EPF contributions, own a home, or maintain some level of savings on a regular basis. Do you make such a mistake? I believe I am guilty of doing this as well from time to time. Though it will not hurt to reward ourselves a little bit, we should not overindulge in our bonuses.
Instead of spending your bonus money right away, consider how you could put it toward paying off debt (such as student loans, credit card debt, or loans for a car or a house) or building up your savings or investment portfolio. It is essential to keep in mind that the accumulation of interest on your loans and credit cards can also cause your debt to snowball.
It's possible that this won't be as exciting as going all out, but if you don't want to take all the enjoyment out of your working life, you should look into creating multiple savings accounts. After you have taken care of your financial obligations, such as your bills and payments, as well as your emergency cash fund, evaluate the amount of money that is left over from your bonus and divide it into various "buckets." For example, you could put some of it toward a new mobile phone, some toward travel, and some toward other possible purchases. Don't forget to put some money away for your savings or investments. You will have the opportunity to participate in prizes up until the time you retire.
6. Overlooking Rising Health Costs
The cost of health care is on the rise every single year! According to the latest report by PwC Health Research Institute, medical expense trends will continue to increase annually. It averaged a 6% increase every single year from 2016-2020. Rising health costs are inevitable, especially for senior citizens who require even more delicate care and attention.
A lot of us Malaysians take our health for granted. We believe that we will always be healthy and fit for the rest of our life. We also think that we can depend on our country's healthcare which is not wrong entirely. What if you need medical treatment immediately which is only available at a private hospital? When there are no contingency plans for illnesses, you risk wiping out all of your savings. Remember that by the time you retire, medical costs will be significantly greater than they are now, and your healthcare demands will increase as you age.
Consider a medical protection plan to cover hospitalization, outpatient care, and other medical expenses. After 65 years of age, if you have a known medical condition or have made past insurance claims, you may not be allowed to renew your coverage if you have a known medical condition or have made previous claims. Therefore, it is essential to ensure that your retirement plan includes monies for such circumstances. You need to consult someone you can rely on or investigate your health coverage possibilities as soon as possible.
Conclusion
It is never too early to start your retirement planning, especially for Malaysians as our income per capita is relatively lower. Most of us will be working extra hard before we retire. Therefore, we should be enjoying the fruit of labour when we hit retirement instead of begging for monetary assistance from the government or other welfare organisations. We also do not want to drag our children and increase their burden, no? It is now or never to start your retirement planning before it is way too late for you.
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