Big 3 retirement income issues
RETIREMENT is certainly not a subject that we wake up thinking of every day, but I hope that the five retirement myths which we shared in January has changed your perception about retirement and that you need to take responsibility to ensure that you are financially secured for your retirement.
We don’t need to be retired to see what retirement really means. We all have 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 standard of living and lifestyle they were living before their retirement. Whilst for others, we see a deterioration of their living standards in their retirement due to inadequate and insufficient retirement income to sustain their retirement.
How much retirement income you need for your retirement will depend on sustaining your current living standards, lifestyle and your aspirations for your retirement years. Without sufficiently replacing your earned income, you may have no choice but to cut back on your living standards and lifestyle, or fall into the dependency of others to provide and supplement your retirement income, especially so if you are no longer able to work for an income.
The key retirement question facing all of us is do we have the means to continue our living standard and lifestyle when we are finally retired. To do so requires us to address the following three big retirement income issues while we are still in our earning years.
Adequacy – to replace earned income
Firstly, we certainly need to ask 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 which the person has been accustomed to.
The assumption behind the 2/3 replacement income ratio is that there will be a 50% reduction in your all your work related expenses, while retirement expenses such as leisure, travel and healthcare will increase by 20%.
Sufficiency – to last entire retirement period
Secondly, people need 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 get older.
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 a few years 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.
Sustainability – to protect against inflation
Finally, people need to plan to have their retirement income inflation adjusted. Inflation has a subtle and quiet way of increasing the cost of living and eroding our 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.
We therefore have to address the retirement income issues now while we are earning our current income. It really is a question of balancing current consumption with savings for our future retirement spending. We obviously are more focused on current living but the fact is if we want to live our retirement the way we want it, we will have to address the issues of adequate, sufficient and sustainable retirement income. If not, you may be leaving it to chance and hope that things will turn out all right when you retire. You certainly would not want surprises at your retirement.
* Dato’ Steve Ong is the CEO of the Private Pension Administrator Malaysia (PPA), the central administrator for the Private Retirement Scheme (PRS). The PPA is tasked by the Securities Commission Malaysia to promote the growth of the PRS industry, create general awareness and educate the public on retirement savings. The PPA also works to protect the interests of PRS contributors. Excerpts of this article first appeared in an iMoney.my article, also written by PPA.