7 practical steps to plan for your retirement

Transitioning from your accumulation of income-earning years to retirement years is a challenge for even experienced investors.

This is especially true in today’s world where recession has wiped out retirement funds, and the prices of basic goods and services continue to rise.

Successful retirement plans are not too complicated and should be viewed as works in progress that must be reviewed at least annually or every six months.

Here are seven retirement planning steps whether you are nearing retirement, already retired, or many years away.

Step 1: Plan for expenses

Identify your current expenses and include significant future changes e.g. home loan payments ending; new healthcare expenses; more leisure travel.

Do not underestimate your expenses after retirement. While the average person’s expenses will decrease after retirement, it’s only about 20%. A good projection will be 80% of your current expenses.

A budget is a very valuable tool not only during your earning years, but more so during your retirement years. Find a balance between comfortable spending and not being an old miser.

In your retirement years, expenses may be more volatile e.g. purchasing a new car; travel plans that exceed budget.

Step 2: Prepare your umbrella

  • Emergency savings: A recommended amount would be 24 to 60 months’ expenses. This higher allocation is to ensure you have more liquid funds available as you may be unable to liquidate investments to raise funds during a significant market correction.

You can hold two to three months’ expenses in a high-yield savings account, and place the rest in a fixed deposit (FD).

  • Medical insurance: A primary need with increasing medical costs. Ensure that your medical coverage has enough limits and covers you at least until age 80 (preferably above age 90).

Check if you can cost-effectively move your company insurance coverage to continue when you leave employment. If you do not yet have medical coverage, some insurers now provide medical insurance plans provided you are in reasonably good health and below the age of 70.

You may want to consider deductible medical insurance whereby the medical insurance only applies if your costs per admission are above a certain amount. Else you must ensure you have enough funds for healthcare and medical expenses.

  • Asset protection needs: This continues to be necessary for any outstanding debt or assets you own such as properties or businesses.

Step 3: Adjust allocations and withdrawals

Place more of your portfolio in secure lower-risk investments so you do not see your retirement funds drop by 20%, 30% or even 50% with a major market correction.

A suggested ratio for age-based allocations would be taking 90 (or 80 if you are conservative) minus your current age in percentage placed in higher risk investment, and the rest in lower risk investments.

For example, if you are age 60, you will have 90 – 60 = 30% in higher risk investments and 70% in lower risk investments.

  • Lower risk investments include cash/cash equivalents, fixed deposits, EPF (arguably), endowments, and annuities.
  • Higher risk investments will include shares, properties, etc.

In your retirement years, you will still want to ensure you have higher risk investments in your portfolio. In the past, the average life expectancy was much lower and people typically worked until they could not work anymore.

Today with higher life expectancy, your retirement years will typically be much longer for 10, 20 or even 30 plus years.

The higher risk investment will improve overall returns on your portfolio to ensure you have enough funds for your entire retirement period.

Go through all your investments to know the real rate of return (using IRR is recommended). You may want to stop under-performing investments, and build your portfolio towards your desired retirement years portfolio allocation over a period of one to two years. Another consideration is to be sufficiently diversified.

Based on your retirement fund projections, set a regular withdrawal from your capital from when you retire.

While traditionally many use a 4% capital withdrawal, a more conservative 2% capital withdrawal is recommended to ensure you have some buffer for withdrawing more funds if necessary.

Step 4: Decide on EPF withdrawals

When you hit age 55, you can make a lump sum EPF withdrawal or opt for regular/ad hoc EPF withdrawals. While you cannot and should not depend on only your EPF savings for retirement, this is a helpful sum towards your retirement planning.

The primary question would be whether you want to withdraw your EPF savings immediately upon reaching retirement age. This depends on how much you trust EPF in handling your retirement savings and the expected returns.

Possible options to consider would be a lump sum withdrawal provided you know where you are going to place the funds. You can also set-up a monthly withdrawal from EPF direct to your bank account with a minimum withdrawal of RM250 per month.

Step 5: Decide on secure income streams

Low risk investments such as fixed deposits offer returns of only 3-4% per annum. Also contrary to popular opinion, most Unit Trusts are high risk investments with high fees in Malaysia.

A secure income stream is a good way to earn better returns while having most of your asset allocation in secure investments. An endowment or annuity can give you regular income towards your retirement cash flow needs.

Not all endowments and annuities are created equal though and you will need to know what the real returns are. The focus is primarily on returns even for a secure investment choice.

A properly structured endowment and retirement cashflow plan will give you returns to cover all your expenses. When the endowment matures, you will have funds available at (or above) the original retirement fund pool you started with.

You should also maximise your fixed deposit returns by getting the best rates available. Some banks offer higher returns for senior citizens, and for priority banking customers, so shop around.

Step 6: Settle tax and estate matters

Work with qualified advisors for tax related matters if you’re still earning an income, and for taxes on your estate upon passing. At the least, you should have a will for proper asset distribution according to your wishes.

Ensure all your non-will assets nominees (insurance, and EPF) are properly listed and up-to-date. Also consider Powers of Attorney to handle important healthcare and financial issues.

If you have assets, engage an advisor for proper tax, and estate planning purposes for proper distribution, tax savings, and to avoid legal tussles among your beneficiaries.

Step 7: Consider continuing to work

Whether you reach retirement at age 55, 60, 70, or even early retirement in your 30s, do consider continuing to work.

For some, it is a necessity to ensure retirement funds can last your expected lifespan. Many successful people work even harder and enjoy work more than ever after reaching financial independence.

Working allows you to give you time and experience in areas that truly matter to you besides the added benefit of preserving your mind and physical health.

This article first appeared in https://mypf.my

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