Friday 29 Mar 2024
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The world population is ageing and is growing dramatically. According to the United Nations, the number of older persons aged over 60 years is expected to more than double by 2050 and even triple by 2100. Globally, the older population is growing at a faster rate compared to the younger age groups.  This trend if left without an accompanying sustainable plan has deep social, economic and political implications for the world.  What is greatly needed and which can provide the basis to bridging this issue is a strategic roadmap to create opportunities for people to start early investment plans that would enable them to have financially resilient lives during their golden years.

Over and above a financial plan, what is important also is for individuals to examine their own priorities and chart perhaps their retirement dreams on the quality of life they want and how active they plan to be. One needs to ensure that in doing retirement planning, the focus should be on both the accumulation phase and the end goal. A successful accumulation stage does not equate to successful retirement. Hence, individuals need to think early in the planning process about things like interest and even hobbies. Make a list of potential opportunities and narrow these down to what is most important to you.

According to Wharton University, research indicates that those who are happiest in retirement tend to be happier by giving back and discovering a sense of purpose. What gives you a sense of purpose? What kind of legacy would you like to leave behind? Though subtle, having a goal and purpose in retirement can impact positively the financial plan for retirement. The focus helps individuals to choose the right activities and investments leading up to retirement, thereby reducing short-sighted tendencies.

Another important element of retirement planning is the consideration for basic needs especially affordability and managing medical expenses. In the Asia Pacific region, overall life expectancy in the last 15 years has grown faster than healthy life expectancy. This means that while people are living longer, they are also spending a longer period of their life with disability. It is critical therefore to have in place good quality medical care and retirement care. In a report by the United Nations, public health-care expenditure was low in many Asia Pacific countries, leading to high out of pocket expenditure. The same is observed in Malaysia. Last year, Mercer Marsh Benefits reported that Malaysians faced double-digit healthcare inflation, higher than the average in Asia. Medical costs continue to be a significant portion of retirement expenses.     

More often than not, savings alone may not be sufficient in ensuring the sustainability of lifestyles after retirement. Hence, it is vital that individuals remain committed from young to two simple, yet important principles. First, put savings to work as early as possible as this is the key to successful retirement due to the power of compounding over the long-term. In the chart below, we see the real return for two extreme scenarios over the past 15 years in Malaysia, bearing in mind that during this period, the inflation rate was at 2.5%. The important message here is that if we do not put a portion of our savings into investment, our savings will be eroded by the effects of inflation. A portfolio that includes some equity or that are fully invested, may provide more protection against the eroding effects of inflation.

Source: J.P. Morgan Asset Management Retirement Series 2018

You may be slightly alarmed by the real return in the worst year (Global Financial Crisis in year 2008) presented in the chart above. This is where the second principle comes into play namely to invest dynamically over time for a good retirement. Your level of wealth and proximity to retirement should be an influencing factor in determining the risk profile of your investment portfolio. The closer you are to retirement, the lesser the feasibility of being fully invested in equities fund. The chart below tells us that as we age, the risk profile evolves and become more conservative with retirement in mind. However, it is also possible for the young to have the risk profile of a middle aged individual. Regardless of any permutation, we need to be clear about our risk tolerance.  

Source: J.P. Morgan Asset Management Retirement Series 2018

In many instances, the uncalculated risks of extended longevity and inflation in medical expenses have the potential to throw any retirement plans off course. A retirement financial plan needs clear goals on what we want to achieve during retirement and absolute awareness of potential risks. According to a study by Visa and The Credit Counselling and Debt Management Agency (AKPK), it was revealed that more than 50% of Malaysians may not be financially ready for retirement by the time comes, exacerbated by the low level of financial literacy.   

Some practical steps individuals can take to build financial resilience for and during retirement are to first ascertain their total wealth. Secondly, they need to ascertain an appropriate amount for investment and thirdly, to consider the range of investment products or options that are available. One age-old investment wisdom that never goes out of style is asset allocation. Asset allocation can be done by compartmentalizing an investment portfolio to a part that provides relatively more protection and another that provides higher risk adjusted return. The best part is that it does not restrict you from investing in illiquid items such as properties. On the side line, changes in life circumstances will also affect retirement plans. One, however, ought to still make plans and navigate the changes along the way. Be proactive and speak to a financial professional who has the necessary tools to keep tab on your progress in achieving your retirement goals.    

Investing for retirement sustainably with a trusted investment manager will go a long way in securing quality lifestyle for the ageing population. It is here that efforts to educate the public on investing for retirement can never be enough and should be done as early as when the individual joins the work force. People close to retiring, or have retired, also need good quality information, advice and guidance that are pivotal in helping them make informed decisions and continue to be actively engaged in society.  

In 2017, Malaysia showed that it had one of the highest levels of financial inclusion among Southeast Asian countries due to openness in financial innovation. This is a great way forward in reconciling the needs of   ageing populations, harnessing the use of new technology and investment trends to bring about positive progress in broad-based financial inclusion.  

There are ample investment opportunities in the market for individuals to enrich their retirement years especially in view of the greater longevity and retirement age, mentioned earlier. Such opportunities include retirement friendly investment products, better income-generating opportunities for retirees and promotion of affordable long-term care of the aged. Underlying all of this is the critical need for a paradigm shift in mindsets, of incorporating one's life purposes and end goals early into the retirement plan in a strategic and comprehensive manner.

If you would like to read similar Citi Wealth Insights articles from over 400 Citi analysts, visit here http://asia.citi.com/wealthinsights

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