Let’s face it, retirement can be a life changing event. For years, you may not need to worry about your lifestyle as there was a “inexhaustible” funds i.e. income, so long you continue to put in your time at work. But all this changes, once you retire. How this inevitable milestone pans out ultimately depends on how prepared you are for it.
A reader recently wrote to me to ask about the preparation needed for his upcoming retirement in 2 years’ time. As far as I am concerned, 2 years does not give much time for proper planning. Ideally, everyone should start with a 3-year lead time prior to retirement to get the house in order so that you have time to plan, organise and learn to generate passive income. However, as the saying goes, better late than never. If you find yourself in a similar situation, consider to follow the strategies below closely:
First things first, use a holistic financial plan to determine whether you can actually afford to retire. If you currently have such a plan, you will know how to use it to check your financial readiness for retirement. If you do not have one yet, now is the best time to consider getting one.
A holistic financial plan that takes into account all your financial information will be able to show you if your money is growing fast enough to fund your retirement. In addition, it serves as a roadmap to guide all your financial and investment decisions during your retirement years. It is a critical and essential tool to have, considering you cannot afford to make any financial mistakes once you retire.
A misconception most people have is that they need to “clear” all their loans and debts before they retire so that they start their retirement journey with a clean slate. This is neither necessary nor advisable, for if you were to dip into your savings just to settle all outstanding loans, you would be putting yourself in a precarious cashflow situation. That being said, you should not start retirement with excessive borrowings either. A healthy debt to asset level should be no more than 50%; while 30% or less is ideal. If your debt level is higher than this, steps should be taken to reduce it.
If you have a few property loans, consider selling off some properties to settle the loans, particularly if one or two are not generating rental income worthy of the effort to maintain them. However, do not redeem and cancel all your loans just to reduce your debt to zero. Contrary to popular beliefs, it is good to keep some credit lines open to take advantage of the availability of cheap money when interest is low. If you settle all your loans, it will be very difficult to apply for new lines of credit once you are a retiree with no documented source of income. Many retirees tend to streamline their credit cards thinking that they could always rely on their past payment records, banking history or bank balances to reapply for one if they need it in future. However, it is not always the case as financial institutions prioritise income levels when it comes to evaluating one’s ability to service the loan.
The recommended cash reserve level for individuals who are still earning active income is 6 months. You should increase your cash reserves to 3 years when you are 3 years away from your retirement age . This allows you to have a bigger buffer for unforeseen expenditure and emergencies.
A glaring change that strikes most retirees is the absence of a steady income stream. It may be wishful thinking to say that upon retirement, you will be able to cut down on monthly expenses such as petrol, parking costs and eating out, because in reality, what you save on may be replaced or even exceeded by other more pressing needs like medical or health products and supplements. In fact, for many retirees, their financial commitments do not reduce, much less cease upon retirement. Take for example the HSBC’s Future of Retirement Survey which found that 67% of retirees in Malaysia continue to fund their children’s expenses, especially for home purchases, by dipping into their retirement funds or EPF savings!
It is for this reason that I strongly recommend putting aside as much as you can while you still have active income, because once that stops, your source for funds become very limited.
Retirement does not mean refraining totally from investing. Some people believe that they should not take any financial risks once they retire and as such, they liquidate all their investments in shares, unit trusts and properties and convert them into cash. What they probably do not realise is that by doing so, they are exposing themselves to even bigger risk – the risk of inflation.
Inflation risk is often beyond anyone’s control. On the other hand, you can learn to manage investment risk. This is why retirees must stay invested but at the same time, be mindful that investment decisions made during their working years and after retirement will be different. This is where a strategic asset allocation statement comes in to assist investors to identify the optimum diversification of their investment assets. At this stage in life, you cannot afford to go for the high-risk / high-return options as you may have done 25 years ago. The prime objective now is to earn between 6%-9% p.a. returns in order to stay ahead of inflation.
Once you retire from your job, all medical benefits and insurance that you used to enjoy as part of your remuneration package will cease immediately. Many people do not even keep track of the medical bills that they have accumulated over the years until they have to pay for it out of their own pockets. Which is why it is essential that you review your own personal medical insurance plans to make sure that the coverage and benefits are right for your retirement needs.
If you have been relying on the health plans provided by your company all this while, it is high time to get one of your own. Insurance is one area where increasing age does not confer preferential rates. The longer you delay, the more expensive it will become for you to purchase a health plan. If you are fit and healthy, take advantage of it now. For once a medical condition goes down on record, the insurance company may exclude certain coverages, impose a loading or even reject your application.
Consider whether you still need life insurance policies if you have them. Many individuals purchased life insurance plans many years ago when they had young families and dependants and continue to diligently pay the annual premiums even though they may not need it anymore. Among the options you could explore include surrendering the policy and getting a lump sum cash benefit (which you can use to treat yourself with a long-deserved holiday for instance) or you could opt to stop paying premiums and instead use the accumulated cash value to service the policy thereafter. This will go a long way in reducing your cashflow burden during retirement and more importantly, it will not deplete your retirement funds too quickly.
85% of retirees in Malaysia feel a sense of regret at not having prepared adequately for retirement. Do not let yourself be part of this statistic. You have spent half your lifetime working to build a secure future for you and your loved ones. Now that retirement is approaching, plan well so that it will be a long and comfortable period that you can enjoy without the burden of financial worries.
For the younger readers who are at the height of their careers, it is never too early to start planning. Time is on your side and you should take advantage of the various financial and investment options available to you. Who knows, you could amass enough net worth to be retiring at 40! For those who are closer to the standard retirement age, so long as you commit yourself to the strategies I have laid out, you are already on your path to a smooth transition towards a meaningful and well-deserved retirement. As Abraham Lincoln once said, “And in the end it’s not the years in your life that count. It’s the life in your years.”
Yap Ming Hui (firstname.lastname@example.org) is a bestselling author, TV personality, columnist, coach and host of Yap’s Money Life Show online. He feels that the financial world is getting too complicated for everyone, and initiated a weekly online show to address the issues. For more information, please visit his website at www.whitman.com.my