Retirement is certainly not a subject that we wake up thinking about every day, but undeniably, we all need to take responsibility for our financial security during our retirement.
We don’t need to be retired to see what retirement really means. We have all seen how our retired parents, friends and colleagues live their retirement years. For those who have planned and saved for their retirement, they continue to enjoy the lifestyle they were living before their retirement. While for others, we see a deterioration of their living standards in their retirement due to inadequate and insufficient retirement income to sustain it their retirement.
How much retirement income you need for your retirement will depend on your living standards, lifestyle, and also your aspirations for your golden years. Without sufficiently replacing your earned income, you may have no choice but to cut back on your expenses, which means lowering your living standards and downgrading your lifestyle, or worse, falling into the dependency of others to provide and supplement your retirement income, especially if you are no longer able to work for an income.
The key retirement question everyone faces is: Do we have the means to continue with our living standards and lifestyle when we are finally retired? To answer this question, we need to address the following three big retirement income issues while we are still in our earning years.
1. Adequacy – How much do you need to replace your earned income?
How much is considered adequate as monthly income for retirement? Accordingly to the World Bank, the simple rule of thumb is to ensure that you have a 2/3 replacement income ratio of your last drawn salary in order to continue enjoying your current standard of living at retirement. To put it simply, if a person is drawing a monthly salary of RM10,000 prior to his retirement, he or she will need about RM7,000 as his monthly retirement income to enjoy the same quality of life.
The assumption behind the 2/3 replacement income ratio is that there will be a 50% reduction in all your work-related expenses, while retirement expenses such as leisure, travel and healthcare will increase by 20%.
2. Sufficiency – How much fund do you need to last the entire retirement period?
It is important to ensure that their income is sufficient to last the whole duration of their retirement years. The key issue here is outliving your retirement funds, which would leave people very vulnerable and run out of income to support when they age further.
Malaysians are living longer and longer. The current average life expectancy of Malaysians is about 75 years and this number is expected to increase to beyond 80 in the years to come if medical marvels continue to keep us healthy. This means, Malaysians on average would have to allocate enough savings to sustain 20 to 30 years of their retirement life so they do not have to outlive their savings, with the current retirement at age 60.
3. Sustainability – How can you protect your retirement fund against inflation?
Perhaps, the biggest enemy of any retirement fund, other than the lack of one, is inflation. Just saving for retirement is not enough if nothing is done to safeguard the fund against the rising inflation. Inflation has a subtle and quiet way of increasing cost of living and eroding purchasing power. As such, we need to make sure our money works hard for us by ensuring the growth rate of our retirement savings and investments is higher than that of inflation, otherwise inflation will erode the standard and quality of our retirement life over time.
These three issues are pertinent issues to take into account when planning for your retirement. They need to be addressed even when we are still earning an income.
It really is a question of balancing current consumption with saving for our future retirement spending. If you fail to address these issues early on and just leave it to chance, things may not turn out the way you want them to be when you retire. You certainly would not want surprises at your retirement.
Get started on your retirement planning by calculating how much you need using our retirement calculator!
For more questions on how PRS can help you address these retirement income issues, leave a comment below!
Dato’ Steve Ong is the chief executive officer of the Private Pension Administrator Malaysia (PPA). He is a seasoned professional with 30 years of experience in the financial services industry, with 21 years involvement with the life insurance business and nine years in the fund management industries. Prior to his move to PPA, he was the CEO of one of the country’s leading fund management companies, which he started and grown.
