Having a sound financial plan can help you navigate the economic climate and stay on track regardless of your source of retirement income.
Many retired Malaysians take an all-purpose approach with their money; ranging from paying for holiday vacations, children tertiary education to medical bills. Whatever your source of retirement income, the question you should ask yourself is if it can sustain your retirement lifestyle?
In retirement, there are three groups of people;
- those who receive government pension,
- those who rely on their EPF savings,
- those who don’t contribute to EPF and rely on other source of income (i.e. self-employed)
Using the EPF calculator below as a guide, let’s take an estimate of how much you would need when you retire:
Source: EPF Retirement Calculator
In the case above, 30-year-old Matthew would like to have RM5,000 (today’s value) a month in his sunset years. He would then need to save up RM2.7 million by the time he is 60.
If you don’t have a solid financial plan, saving that amount of money will be challenging, especially if you are self-employed. Even EPF contributors have difficulty saving enough for their retirement.
Apart from concerns about paying for general necessities, you will also have to account for health issues that may arise.
According to the Nursing Homes & Care Centres in Malaysia Survey conducted by Managedcare in 2014, you would need RM240,000 (excluding inflation, longevity risk and unforeseen health problems) to cover the cost of basic care for 5 years in a nursing home.
What if you need other services such as specialised care (dementia care for example), rehabilitation, a caregiver, and access to equipment, etc.? Does your financial plan adequately account for long-term care?
If for whatever reason you decide not to seek a financial advisor’s aid, you will need to develop the skill set to make effective plans for your personal finances. Here are 5 steps to follow when putting your financial house in order:
- Create a budget to understand your cash flow
A budget is the most basic way of understanding your finances. With various apps and software – free and paid alike – you can easily create a budget by taking note of your income and expenses.
After a few months of doing this, you will have a clear understanding of where your money is going. This will help you identify your recurring expenses and adjust your monthly spending accordingly.
Remember, your budget is prone to continuous changes. You may receive an increment at work, decide to change your car or unexpectedly develop an illness which requires long-term care. Therefore, it’s important to always review and revise your budget – whether quarterly or annually – to reflect your new level of income and expenses.
- Create a plan to pay off your debts
There is a difference between good and bad debts. Good debts generate income and increase your net worth such as taking a student loan, mortgage or business loan. For example, a business loan enables you to kick-start your business plans that would give you returns in profit.
On the other hand, bad debts refer to ones incurred by purchase depreciating assets like a hire-purchase loan which is out of your budget. The only instance an auto loan is considered a good debt is when it helps you earn an income – e.g. delivery of goods or services that generate an income.
Identify your debts to categorise whether they are good or bad and take into account the interest rate. Doing so will help you come up with a solid plan to pay them off.
- Boost your savings through the right investments
It goes without saying that you should consistently put aside money for your financial goals. The ultimate goal should always be your retirement plan.
However, purely putting away money in your savings account is not going to bring you closer to your goals. This is where investing comes in. By knowing how much of your income you need to save, you can proceed to find the right investment product for your savings that will gain you the returns you need.
If you’re in your 40s and above, you will likely have an established investment strategy but how you divide your money now – which affects your risk level – changes as you move closer to retirement. Hence, you need to review your current strategy and ensure your allocations are still appropriate.
- Planning your insurance coverage
Life is fleeting, and although we need to prepare financially for a long retirement, we should also have a plan in the event we pass on. We need to think about what will happen to our family when we are no longer around.
Will they be able to survive financially? If you have any financial dependents, make sure that you have adequate insurance coverage. Your coverage should not only be for death, but also cover Total & Permanent Disability (TPD) and critical illnesses.
- Account for your long-term care
As you get closer to retirement, it is advisable that you review your healthcare plans as well. This will help you spot any potential gaps your financial plans may have overlooked in your healthcare.
Managedcare offers these services through their Care Administrator who will provide you with a care assessment to gauge potential care needs. You may also find Managedcare’s CareTRUSTTM to be a useful tool in this endeavour as it helps people set aside money for long-term care.
When to draw the line
While this list isn’t comprehensive, it does cover key essentials you need in your personal financial plan. The bottom line is your financial priorities and plan of attack relies on one person – you!
About the author: Aged Care Group (ACG) is an organisation engaged in the business of elevating and providing aged care services in Malaysia. ACG is driven with a strong vision to advocate innovation and transformation in ageing by offering continuum care as a premium choice for enriched living.
We operate in an ecosystem that provides integrated care services and products through meaningful partnerships with individuals, government, organisations and corporations. ACG seeks to be the forerunner in all things related to aged care, building on the years of knowledge and experience of its shared holders and management team.
A detailed profile of who we are can be obtained at www.agedcare.com.my