CAN you afford to retire? Not just at 60, but at any age? Those are not trick questions. They demand a serious answer as online discussions now tell us that it is not enough to retire with just US$1 million in the United States, or RM1 million here in Malaysia.
A CNBC portal quoted a certified financial planner, Mark Avallone (author of Countdown to Financial Freedom) as saying that a 37-year old executive planning to retire at 67 with just US$1 million (RM4.01 million) in savings will live below the poverty line. Avallone added that for most Americans, there has been a serious lack of proper investment income and planning. When inflation is factored in together with longer life expectancy, a pension crisis is inevitable. Calling the scenario “a toxic formula for successful retirement”, he said retirees in future will have to “self-fund their retirement”.
A study was undertaken recently in the US to determine how long a life-savings of US$1 million can last. It focuses on the average expenses of retirees in respect of housing, utilities, transportation, healthcare, food, etc. It reveals that savings last longer in some states such as Mississippi, Arkansas and Tennessee, where retirees can live comfortably for at least 25 years. However, in other cities like Hawaii, where the cost of living and real estate prices are higher, retirees will exhaust their savings by the time they reach 75 years old.
So, what is the solution? Do not retire until our nest egg grows bigger; alternatively, take another job after retirement. In my frequent travels to Kuala Lumpur, quite often the Grab car drivers I’ve met are “early retirees” — they quit their day jobs before they touch 55 and become Grab drivers whilst having a small business on the side.
One way to avoid the million dollar poverty (as suggested by Avallone) is to earn more or spend less. For workers who are “near retirement”, he suggests they get a “hobby job” and then save all of that extra income. If that is not possible, then he suggests we take a serious look at our spending habits and learn to differentiate our “needs” from our “wants”. Needs are limited, but wants are unlimited.
Another study conducted by the Insured Retirement Institute (IRI) reveals that less than 25 per cent of working people interviewed believe they will have enough money to support them through their retirement years. The majority say they cannot afford to retire.
A retirement portal recommends that future retirees do four things to improve their retirement prospects:
MAKE a real effort to save;
GET a retirement portfolio in good shape;
STAY on the job for a few more years; and,
CONSIDER radical moves, such as getting a less expensive home or moving to a less expensive location.
In the mid-90s when I was contemplating early retirement, I took the last option and moved my entire family north to settle down in Kedah. I remember telling friends then (why I left Kuala Lumpur) that whilst I could not immediately increase my income, I could certainly cut down my expenses. Moving north proved to be a wise decision.
Another portal for senior citizens offered the same advice. It said that whilst the old adage “work longer and save more” is certainly good advice, for many working Americans of retirement age, working longer and saving more is not a viable possibility. Instead the portal advises future retirees to “retire somewhere inexpensive”. It says that if you have very little retirement savings, it makes sense to retire somewhere other than your current location.
The same portal recommends that senior citizens approaching retirement pick up a hobby “that pays”. It says that if you have a passion or certain skills, you can supplement your retirement income doing something you really enjoy. When you enjoy doing something, it does not feel like work.
From my own experience over the last two decades, this is indeed excellent advice. The little income that comes from my seminars and writings go a long way in paying my monthly bills.
In March 2015, Employees Provident Fund chief executive officer Datuk Shahril Ridza Ridzuan told the media that more than three-quarters of our working people who reach retirement age (at 55) that year would not have enough savings to live above the poverty line. He explained that most of these workers were on low wages when they started contributing to the fund in the 1980s, and continued earning relatively low salaries till they turned 55.
According to EPF, more than 75 per cent of 14 million EPF contributors earn less than RM2,000 a month. About 15 per cent earn between RM2,000 and RM5,000 a month, whilst those earning more than RM5,000 are in the top 10 per cent bracket. For a retiree to be able to spend at least RM800 a month for the next two decades (until he reaches 75), he must at least have RM196,800 or RM200,000. Only about one-fifth of the EPF contributors who retire that year have that much money in their savings, said Shahril.
With insufficient savings to support their monthly needs for the next two to three decades, these retirees must also face escalating living costs and healthcare costs as the years go by. This is a “financial time bomb” in the making, said financial planner Robert Foo, chief executive officer of MyFP Services Sdn Bhd.
The minimum figure now quoted by our financial planners when they advise clients looking at retirement is that at age 60 they must have at least RM1 million in savings. If they do not have that amount, be prepared to live very frugally.
Unfortunately, according to a recent study by Khazanah Research Institute, “people are borrowing too much and not saving enough”. The risk of “pensioner poverty” is frighteningly real.
Not everyone, however, believes there is going to be a looming retirement crisis. Co-author of the 259 Trillion Vs 5 Trillion Series, Sharif Rahman, believes that the crisis would be the lack of education among Malaysians in managing their money. He says many Malaysian workers and future retirees have assets other than their EPF savings.
Salleh Buang formerly served the Attorney-General’s Chambers before he left for private practice, the corporate sector and the academia. He can be reached via firstname.lastname@example.org