Financial Planning upon Retirement

Question 2

Financial planning has become more crucial for Malaysians as a large proportion of Malaysians do not accumulate sufficient financial wealth upon their retirement and personal bankruptcy has been on a rising trend especially among the younger generation of Malaysians.

(a) Factors leading to insufficient wealth accumulation upon retirement.  

In the year 2016, the Employees Provident Fund (EPF) stated that only 22% of the 6.7 million EPF active contributors who aged 54 years have sufficient savings of RM196, 800 or more to sustain themselves during retirement. There is the fact that one out of three of Malaysian does not have saving account, and most have not saved enough to last them over five years after leaving the working world (Shagar, 2016). There are few factors that leading Malaysians to insufficient wealth accumulation upon retirement.

The major factor is Malaysians are lack of retirement planning. In Malaysia, independent surveys show that a majority of Malaysians are not being prepared for retirement (Shanmugam, Arunagiri, & Zainal, 2013). In Fact, Tan Sri Wan Abdul Aziz Wan Abdullah has said  that the awareness of financial planning for retirement among Malaysians is still low due to lack of financial literacy (2015). They may be short of the ability and information to understand the significance of the need for a plan or to effectively figure the right plan. Moreover, with the incorrect sense of security that their EPF savings will assure them through retirement, most of them normally plan too late for their retirement (Reisch). Therefore, financial knowledge as well as retirement planning are the main factor that leads Malaysian to insufficient financial wealth upon retirement.

Besides, high standard of living which results in inflation rate risk is also a factor. According to the iMoney National Budget 2016 Sentiment survey, Malaysians main concerns are focused on the rising cost of living (Sunbiz, 2015). High cost of living has become the top agenda as Malaysia keeps on confronting challenges in 2016 (Fintan, 2015). Government’s recent action, such as removal and reduction of fuel and road toll subsidies, weakening worldwide economy, tumbling currency and political instability had sped up the increasing cost of living (Sunbiz, 2015). Increasing in commodity prices which includes foods and energy had also increased consumer’s daily expenses (Poenisch, 2016). In addition, the implementation of the Goods and Services Tax (GST) by government since April 2014 had increased the Consumer Price Index (CPI), which is used to measure inflation (Sim, 2016). The impact of high inflation rate has lead to depreciation in value of Ringgit, reduction in the consumer spending, and increases in cost of living over time. According to a recent survey conducted by the Society of Actuaries, inflation has been located as the first place of the retirement threat (Grebel, 2012). In fact, most of the Malaysians have lack of financial planning knowledge and literacy; hence, they failed to properly account for the impact of inflation (Barrington, 2014). Thus, this had caused Malaysians do not accumulate sufficient wealth upon their retirement.

Higher education fees for children had also affected Malaysians’s insufficient wealth. As the survey done by the London-based Expert Market, it revealed that Malaysia has ranked as the 5th most costly country in the world with regards to getting a university education as a result of working Malaysian parents has spent 55% of their salaries to nurture one child for a university degree (Ram, 2015). Roger Michaud said that financing college isn’t only a saving issue; likewise it is a retirement issue. Increasing in the cost of education is the main factor that burdens many parents. With a respectable objective that a parent does not want to see their children bearing under a pile of student loan debt, unfortunately they have many sacrificing their own retirement saving to help secure their children’s future (Michaud, 2016). Thus, this had leaded many Malaysians parents towards insufficient financial wealth upon their retirement.

Furthermore, increasing medical fees is also one of the factors. With the amendment to the Private Healthcare Facilities and Services Act 1998, medical fees have now been further increased (Brohier, 2014). Due to this medical inflation, insurance coverage prior to the increment may not be able to cover the medical cost incurred by policyholders (Iris, 2014). Hence, insurance companies increasing their charges and premiums of medical, health and investment-linked policies by up to 20% (Iris, 2014). In fact, this will lead people unable to save enough for their retirement.

Lastly, most of the Malaysian were on low wages when they started contributing to the fund in 1980s, and continued earning relatively low salaries till they turned 55 (Reporters, 2015). Malaysians simply do not earn enough to manage the costs of living and yet save money for themselves when they retire (Wan, 2016). In fact, low wage levels will hinder Malaysian’s saving for retirement (Satter, 2015).

Recommendation

To avoid insufficient financial wealth upon retirement, financial planning is very important. A financial planning seminar themed “Healthy and Wealthy Life Essential” was held by Amanah Saham Nasional Bhd (ASNB) with the vision of enriching the knowledge of the local community on smart financial planning and change their attitude on the need to invest and prepare for retirement (2015). Besides, many events, campaigns, workshops and services such as Retirement Advisory Services (RAS), agency’s debt management program, counselling and debt management services are provided by Star Media Group in collaboration with EPF, the Credit Counselling and Debt Management Agency (AKPK), and the Private Pension Administrator Malaysia (PPA) in order to offer advice and guidance on retirement plan to Malaysians (Nathan, 2015).

Furthermore, to properly account for the impact of inflation which had raised the living costs, one of the ways is to reduce spending or daily expenses. As listed in (Financial Guide), Malaysians should cut off their spending includes mortgage costs, consumer debts, credit card costs, bank fees, utility costs, and phone bills. Studies have shown that these savings can add up throughout the years to a substantially increased retirement fund. So, Malaysians should plan for their spending by reducing unnecessary expenses.