FREE MALAYSIA TODAY. 22ND SEPTEMBER: You have just turned 55 and have saved up a significant nest egg for your retirement. Now what?
Common questions asked by retirees in Malaysia include how money should be invested, whether properties should be kept or sold, and whether a fixed deposit (FD) account is the way to go, among others.
Here are some pointers to help you better manage your retirement fund.
1. Don’t be too conservative
Assume you have RM1 million saved for retirement in the form of unit trust funds, stocks, properties and others. Should you liquidate everything and put it all in a FD account so you can live off the interest?
It would not be wise to hoard a big pile of cash and have a low-risk profile that limits your equity investment to only 10-20% of your portfolio.
While it is understandable that, having retired, you would want to preserve capital since you no longer have a regular income, it is also important to have enough liquidity.
Set aside enough to cover expenses for two to three years in short-term and low-fluctuation assets. This will come in handy in the event of an emergency or economic downturn. If, for example, you spend RM80,000 a year, set aside RM160,000 or more in low-risk and low-fluctuation investments.
Options include:
- a FD account
- a flexi-loan linked current account that you can withdraw from anytime
- money market funds, bond funds, or fixed-income funds
- Versa, the digital cash-management platform that earns you interest on par with FD and gives you the power to withdraw your funds anytime you wish, without penalty
- short-term P2P financing notes via platforms like Funding Societies, MoneySave and CapBay
- EPF, where you can have a dividend rate that beats FD.
It is also a good idea to retain your credit cards as your unused card limit could help in an emergency.
2. Avoid investing in areas you don’t understand
This point is very important. Capital lost through money games, scams or highly leveraged instruments is very difficult to recoup.
If you didn’t pick up any investment skills while working, your retirement years are the best time to learn. Differentiate between speculating and investing. Do more readings and attend courses. Learn how to identify good businesses, become their shareholders and tag along with their business growth.
Even after retirement at presumably age 55, your investment horizon is still long-term. The equity market is a good place to invest your retirement funds, and there are three ways for you to do this:
- Full involvement, provided you have the skills and knowledge to pick good stocks. You should be able to identify good businesses, buy shares at a reasonable price, and hold on to them to ride their growth.
- Minimum involvement, if you have no interest in screening stocks, reading or analysing financial reports. Invest in the broad market through exchange-traded funds or unit trust funds. Construct your portfolio and evaluate it periodically.
- Hands-off, meaning you hire other people to do the investing for you. You can engage licensed financial planners and investment advisors, or use the services of a professional fund manager.
3. Don’t rush to pay off your mortgage
While it is understandable that you would want to be debt-free, keep these in mind:
- Property investment is profitable due to the leverage of a housing loan. The return rate you get drops when you use smaller loans.
- Interest expense is an expenditure you can deduct from your rental income. When there is no mortgage, it means your net rental income will be higher, resulting in higher income tax.
- The interest rate for housing loans is low. Historically, it has been lower than the EPF dividend rate for the past 20 years.
This leads to two questions:
- Should I use my EPF to pay off my housing loan?
It is unwise to pay off housing loans with EPF. It reduces your return and also turns liquid funds into home equity, which is much harder to extract. You will have to refinance or sell the property to get your money back.
You should have a liquid fund to pay off your mortgage. There is no urgency to pay it off quickly or all at once.
- Should I sell my properties?
Generally, two types of returns can be derived from an investment property – capital gain and rental yield.
Retirees have to consider whether they want to actively manage their properties. If you don’t like the hassle of property management, there is the option of hiring a property manager.
Alternatively, consider selling off your property portfolio. If your rental yield is 1-2% of the property’s market value, it would be better to sell and shift the capital to other assets.
Other reasons to sell might be that the property is old and needs lots of maintenance and repair, or if it is a leasehold property with an expiring lease of fewer than 30 years.
But if you have a commercial property that has reliable tenants and does not need much in the way of upkeep and repair, it would be a good idea to hold on to it.