7 misconceptions about saving for retirement
Many Malaysians are insufficiently prepared for retirement. Read on to find out how you can fix this dangerous situation.
Planning for retirement is probably one of the greatest financial pressures in life. Why? Because the amount is substantial considering Malaysians can live 30 years or more after retirement.
To make things worse, there always seems to be a more pressing reason that requires the money originally put aside for retirement.
It has been reported that Malaysians are insufficiently prepared for retirement. Here are seven reasons why.
Misconception 1: ‘Time is on my side. I am only 24 and just started working.’
When asked about the best financial advice ever received, 63% of existing retirees said, “Start saving at an early age!” (Source: For HSBC report)
As a young person, retirement seems far away. Perhaps you think or have been ill-advised to “play first” and plan later.
Like the story of the grasshopper who played all summer while the ants gathered food for the winter, you have a great advantage right now. Choose to be the ants and not the grasshopper.
With the power of compounding interest, your retirement fund will grow even more if you start now. The sooner the money goes towards your pension, the more cash you get at the end.
The day you receive your first paycheck is the best time to start your retirement savings. It’s okay if you have missed the boat because starting today is still better than starting tomorrow.
Misconception 2: ‘I’m too old, why would anyone my age even try’
Suddenly children are older, you are older, and retirement has crept up faster than expected.
It’s never too late to do anything of value, and that includes saving for your retirement. Yes, you may have to invest more money to make up for the shortfall, but remember the more you save, the more you can spend in your golden years.
Even if you only have five more years to retirement, use it to improve your savings. Take it seriously – get a financial plan for yourself, one which shows a need for a large drop in buying things and a jump in earnings.
Misconception 3: ‘I’ve already secured my retirement funds in savings accounts and fixed deposits’
Yes, but what about inflation?
The value of the money in your bank account will purchase less stuff today as your buying power dwindles with rising inflation. Though a bank account is not subject to the volatility that comes with distinct assets, the decreased buying power creates a serious threat to your pension fund.
Instead of putting every ringgit into a savings accounts, allocate funds to invest in shares, gold, real estate, or other investment vehicles that have a better rise in value to combat inflation.
Misconception 4: ‘I’ve got EPF. It’ll take care of my retirement needs’
Historical data shows the money in EPF is unlikely to be enough to fully support the contributor throughout their golden years.
Can RM210,000 last you 20 years in retirement? That’s the average savings for contributors aged 54 (EPF 2018 Annual Report). Let’s look at a simple calculation:
- Assuming your household’s monthly post-retirement expenses = RM4,000 (Not including unexpected financial emergencies).
- So, per year you need, RM4,000 X 12 = RM48,000
- Split the EPF savings down into years’ expenses, RM210,000/RM48,000 = 4.375 years.
Do you still think you can live for the next 20 years with RM210,000 in EPF?
Take remedial actions now. Develop a financial plan, cut back on expenses, and work on budgeting. Seek a professional financial advisor if you need to.
Misconception 5: ‘I work hard for my money. I want to enjoy my money now’
Saving money for retirement and spending money on life’s little pleasures can co-exist by using the “50/20/30” budgeting rule popularised by the book “All Your Worth: The Ultimate Lifetime Money Plan”.
The rule is to allocate your take-home salary to:
- 50% to your Needs (food, utilities, car, housing loan)
- 20% to your Savings/Investments (emergency fund, mutual fund)
- 30% to your Wants (movies, dining out, branded shoes)
Set your budget per your financial plan and have the self-control to stick to it.
Misconception 6: ‘Building my child’s education fund takes priority over my retirement fund’
Contention over funds is not an issue if your earnings can comfortably cover both education and retirement funds. It becomes complicated if you have debt. The question of priority can stir emotions.
When push comes to shove, give priority to your retirement over education. Why?
- The only source of income to pay for your basic retirement needs is your retirement savings.
- Though saving for education is important, it becomes a luxury when money is limited. Your child can get funding from other sources whereas you can’t get a bank loan to fund your retirement.
- Take care of your retirement fund first. Then work your way up financially to save for your kid’s education.
Misconception 7: ‘I need to study the ins and outs of investing first’
You need not become an investment guru to invest. What is the best way to learn investing? Just do it. Start small by saving early and consistently.
Speak to a financial advisor about finding the right investment mix based on your current financial capabilities, life goals, and risk appetite.
Regularly monitor and review your investment for whether it requires changes perhaps because of life events.
By starting early and investing small amounts consistently, your chances of meeting your retirement goals are much higher.
This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.
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