To Spend or To Save: Are My Money Habits Putting Me At Risk?

This is the first journal entry of Sean, your average neighbourhood Joe from a middle income family and the only child of ageing parents, living in suburban KL. Thus far, I am able to make enough income to support my parents and continue Maria’s employment to look after my parents and manage the house.

I used to think I had all my financial bases covered thanks to a steady job and smart decisions on investments that paid off. I thought I had a solid plan to achieve my vision of a blissful retirement the moment I could make my full pension withdrawal at 55. I knew exactly what I was going to do to grow my funds while enjoying retirement. I was quite confident in my financial security and strategy. That is until Mum and Dad’s health needed more attention.

In a nutshell, Dad was diagnosed with third stage liver cancer and Mum’s health took a nosedive while we cared for Dad, all the while expenses rapidly rising. Even with Dad’s insurance and monies from savings and investments, it was very troubling financially.

Even though Dad had done his financial planning, he did not expect to be diagnosed with cancer. The accumulated wealth from his savings and investments did not adequately account for his healthcare.

I was very much in danger of repeating that mistake. This experience made me re-look my behaviour towards money, lest my saving strategies fail to account for the unexpected.

It is common for most Malaysians to take their entire pension at retirement with big plans to invest in a business, pay off financial commitments, go on a series of holidays or any other variety of indulgence (experiential or otherwise). According to Dato’ Steve Ong, CEO of Private Pension Administrator Malaysia, 50% of EPF contributors spend their lump sum within five years of retirement (‘Retirees need financial education’ – December 9, 2014).

There’s nothing wrong with enjoying hard-earned retirement savings so long as you have a solid plan and know what to expect. I have to know whether my spending habits are risking my retirement plans.

Last year, The Star reported that 90% of Malaysians chose to keep the full pension withdrawal age at 55 instead of raising it to 60 (Most contributors not interested in other withdrawal option – April 22, 2015). If Dato Ong’s statement is any indication, how many Malaysians who chose to keep the status quo will eventually become flat broke retirees in five years?

Coupled with the option for employees to keep 3% of their EPF contribution (Recalibration: Malaysia Budget 2016 Highlights – January 28, 2016), the question again comes back to “Do I spend or Do I Save?”

Without a doubt, some would favour immediate usage over the loss of higher accumulated wealth in the future. In some cases, the choice to lower contributions is justified, but is withdrawing a smaller pool of wealth at 55 the only risk?

As it is, Malaysian families typically find themselves repeating a vicious cycle of financial burdens due to healthcare costs. The scene usually consists of adult children supporting their own family and their aged parents, who have exhausted their pension savings.

When they become ageing retirees, in need of healthcare themselves, they discover their savings are insufficient to cover the costs and their now adult children need to step in. Thus, the cycle begins anew. Should I then risk lowering my EPF contributions?

Assuming your current salary is RM4,000 and you have decided to lower your EPF contributions, the RM120 you are likely to spend on a Friday night outing could have been RM43,200 more in the EPF for your retirement (and healthcare if age doesn’t treat you kindly), factors of salary increments aside.

In his interview with The Star (67% of EPF members not ready for old age – November 21, 2015), Deputy Finance Minister Datuk Chua Tee Yong said only 20-25% of Malaysians are financially literate.

Yet even the financially literate are not immune to making mistakes in financial planning and investments as having access to more funds comes with a risk of overspending. This is especially true of those who might miscalculate each month’s spending in early retirement and leave too little for their later years, especially when medical and caregiving services are needed.

Not leaving aside enough for your healthcare needs later on in life coupled with the fact that people are living almost two decades longer (World Health Organization’s report, World Health Statistic, 2014) is a recipe for disaster. There is a major risk of poverty and even physical suffering as a result of outliving your accumulated wealth.

Russell Investments’ director emeritus Don Ezra stated that once retirees live past the age of 75, longevity risks (the risk of living longer than expected) exceeds equity risks, which is the risk involved in holding equity in a particular investment (Why I love deferred annuities – January 19, 2016).

With those risks in mind, perhaps it is time to look for an annuitising option – where I can rely on a set amount of income to arrive on a monthly basis, subject to the return of my investment – to help manage my spending during my retirement.

So, what are the options for the future of an ageing retiree?

Perhaps a service which channels annuitised payments into healthcare planning and services is needed. Given the nation’s impending ageing status, I imagine future circumstances will be very difficult for both businesses and the general public if these services are slow in development.

This development is certainly a step in the right direction if the nation intends to reach a developed nation status by 2020.


Disclaimer: The following is the opinion of the writer and the recipient acknowledges that Aged Care Group Sdn Bhd and its associated companies are unable to exercise control to ensure or guarantee the integrity of/over the contents of the information contained.

First Published in Smart Investor, March 2016, Issue 311

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