“There are 3 basic components in proper financial planning. Wealth accumulation – money you get from salaries and all other forms of regular income, wealth protection – insurance policies that give you income replacement in case of critical illness and wealth distribution – how do you plan to pass it on in death or even when you are still alive? You can do this with a will and/or trust.Â
1. Under what circumstances should one consider putting money into investment?
It is normal for anyone to invest when he has surplus money but before considering investment he should have insurance. Here’s a typical scenario. When you first start work aged 20 something, you wouldn’t have enough money to put aside for investment. Insurance is a form of income replacement or savings in the eventuality of sudden critical illness and puts you off work for 24 months or so. You should buy an insurance policy that will pay you an amount equivalent to that annual income. A hospitalisation plan is also important, you should buy it when you are healthy. Don’t wait until you are unhealthy to buy a plan, insurance companies are not likely to accept you.
With that taken care of, and when you earn more money as your career progresses, then you can set aside some money (for investment). Pension funds can also help the working population to save money. A certain percentage of the pay of any gainfully employed individual would be set aside as a retirement fund. The point is, there isn’t always enough. We are often told that, due to various reasons, many people do not have enough funds to retire.
It brings us back to the question of when will it be the right time to invest. When you have taken care of the basic insurance plans for health and income replacement then you can consider investment.
There are so many avenues for investment and a traditional one is to buy a property as people believe that this is better than renting a property. That is not always true because the price of property has gone up so much and income hasn’t increased much.
If you buy a property, in the first few years majority part of your repayment goes to paying interest on the loan. However, if you rent a property, you may be renting at a fraction of that sum. Ideally should only own one property and not multiple properties.Â
2. When do you buy properties?
Until you have fully paid for the property that you are living in that property is more a liability than an asset. This is because when you rent out a property it isn’t always that the rental can cover your loan instalments. It doesn’t mean you can make the cash flow positive. Rental in Malaysia, compare pre covid with current rates, it hasn’t increased much. As long as you have not paid up for the property it is not an asset.
Your goal should be to pay off all your liabilities before retirement. That will become a very important component of your retirement. The rentals you receive from these paid-up properties will be your passive income to supplement whatever you get from your pension funds. Don’t be saddled by mortgages when you retire.
It is very common for retirees to hold properties. Apart from that, they also do Fixed Deposits bargain hunting. Many retirees, spend their time getting to know different bankers who can inform them about promotions of higher interests that they can take advantage of.
They will scout and hunt for better deals, moving their money from one bank to another whichever earns them higher interest. That’s how they earn their money. Some will invest in ASB or Tabung Haji.Â
3. What are the rules for enhancing income after retirement?
Retirees want predictability and they don’t want to have so much uncertainty. Because they are always on the lookout for this predictability they will keep looking out for avenues that they can get the most earnings for their money.
Generally, the rule of 100 for retirement is to put 60 per cent of the investment in low-risk fixed-income instruments like FDs, ASB, bonds and SUKUK. The balance of 40 per cent can be invested in others like Gold, equities and unit trust.
Sometimes, the search for investments that yield high returns can make them vulnerable to scammers who would claim much more than the traditional but safe schemes. Retirees are targeted because they have a lot of cash in hand.
Another rule to maintain a lifestyle as pre-retirement, you should have two-thirds of your last drawn salary as your passive income. If you retire at 60 with an income of RM15k, you need to make sure to have RM10k. How to plan? Invest when you are in your 30s. When you have a surplus, buy some unit trust or shares. These days in the internet era they can buy on their own online. The aim is that you don’t want to sacrifice your lifestyle. One main asset is the pension fund. If you have RM1 million and you get an annual dividend of RM60,000 then you will have RM5k for expenses a month. If you have a property that is paid off you can have passive income, insurance policies, and blue chip shares, they all can help to make up for the balance.Â
3. Recommend investments for people with dependents still in school
A lot of people confuse retirement with children’s education. They use their retirement fund to finance the kids’ education. It is not wrong but it would be better to have an education plan for the kids when they are young. Do this through a savings account or insurance plan.
There is a risk in using retirement money to pay for education as it is meant to take care of old age.Â
4. How should a portfolio for a retiree look like?
As a financial planner, I would first find out about the person’s investment experience before I propose some ideas. If the idea is too foreign they would not accept it. Sometimes I would ask them about their risk tolerance. For instance, if I were to ask them whether they would like to make a 6 per cent return they would say yes and they would also say the same for 8 to 10 per cent returns. But would have to understand there is also a risk of minus 10 per cent in returns. In general 4 to 8 percent returns as a whole portfolio of retirees. I would put 50 per cent of the money into fixed-income instruments like ASB, pension funds, and bonds where there is predictability and cash flow.
If they have already invested in these instruments on their own then we would put more into equity in the portfolio for them. Clients need to tell the financial planner about all their other investments so that they can plan for them effectively. But it takes time to develop this relationship.
I have a client in her 70s who started with me when he was in his 50s. At 58 he told me he wanted to retire. He showed me his books and I calculated that he could retire with a monthly income from his investments. Today he is drawing RM7,000 from the portfolio that had retained earnings. In general, when you have a profit you can withdraw.
You can work out a plan with your planner to say you would want to draw out some income after 3 or 5 years. Stipulate when you want to draw regular passive income. Work with them to come out with a plan to support your objective.
When you take money out of a pension fund to put into a portfolio you need to know that there will be some higher risks. It’s not wrong but be aware that you are taking on higher risks. People do take out some money before retirement to put into investments to enhance their returns because they would weigh returns from the pension fund at the point of retirement to determine how much they can afford to take out to put into investments to enhance their income by the time they retire.Â
5. Wealth distribution, the final component of a complete financial plan
Many Malaysians don’t have a will even though it is not difficult to have one drawn up and it doesn’t cost a lot of money. For investments that are in a portfolio a beneficiary should be named and a trust will be set up by the financial planning consultancy. The next of kin would be required to a death cert for the trust to transfer ownership of the portfolio to the beneficiary and he/she can decide to sell or retain the portfolio.
– JE Tan
Contact Choong Ju Kim at +60 12-222 0800 for enquiries and consultation
