The layman approach to retirement is to save a huge lump sum of money, and then set a limit of how much one could spend on annual basis for the next, say 20 to 30 years. Now, layman doesn’t necessarily means he or she is not educated. In fact, a person could be a successful businessman but because of this distinct lack of understanding on the time value of money, he could still be a layman when it comes to retirement planning. Of course, this could be detrimental to one’s financial position due to one’s inability to extrapolate their retirement landscape in the future.
In the book, Roadmap to Financial Freedom by Yap Ming Hui, he quoted a case study where Tim, 50, the owner of a chemical distribution company sold off his company for RM 3 mil and planned to live off the 4% fixed deposit interest rate generated by his 3 mil principal (4% x 3 mil = RM 120k) for the next 20 years. It goes without saying that he intends to maintain his pre retirement lifestyle as well. The unspeakable flaw in this is that Tim treated inflation as non existent. He naively assume RM 120k in today’s value will be worth the same 2 decades later. The simple analogy to this is – we may earn thrice as much as our father in his age, but that does not mean we feel 3 times richer today. In fact, it’s quite the reverse! It only means our purchasing power does not grow in tandem in inflation.
With this first concept in mind, there are a few inputs to consider in drafting out a retirement plan. Inflation, retirement period, retirement withdrawals, lump sum retirement fund and its growth during retirement. Certain assumptions need to be made and nothing is accurate at the first go, so periodic and holistic review of the plan is absolutely essential.
The second is accumulation mindset. Now you may asked, what’s the difference between accumulation and savings? I don’t know about you but my parents are excellent savers. But saving only stops there – more often than not, it does not preserve the value of money. But we don’t have to like that since now, we know the concept of accumulation – which is, saving and growing our savings as well, beating inflation and preserving the value of money in the process. Without this in mind, the result is quite tragic. We heard stories of people who depleted their EPF savings in just a few years even though they may have a substantial amount. Accumulation can only be accomplished with sustained spending as well.
The third, but certainly not the least, is medical expenses. This could potentially be deadlier than the silent killer – inflation, when it actually hits. I’ve talked to individuals in their fifties who admitted to me they overlooked of getting their own medical card when they were in employment. Then, just before the mandatory retirement, it struck him – nobody is going to cover his post retirement medical bills.
If you are reading this, then I don’t want this to happen to you. Yet, I know what you are thinking – you probably don’t want to get a redundant medical card while you are covered by your company.
But do you know that there is this Second Medical Card in the market nowadays? It could well be a good complement to your company medical card. Best of all, it is auto-convertible to First medical card at retirement age – 55.
For example, if your company medical card coverage is RM 30k/year, you could get a RM 30k deductible medical card, with minimum premium. Which means, only RM 30k and above medical expenses will be covered by this second card. However, when you reach age 55, this second card will convert to become a zero deductible card – which means any medical expenses can be charged under this card – at the time when your company medical coverage ceases. This happens without needing you to prove your health condition at age 55.
How much this cost? Here’s how much it cost per year for a RM 15k deductible. Cheap? Yes. Peace of mind when you retire? Yes. Note that I could not explicitly state in this article which company is offering this because I am not an agent of any company, so I don’t want to risk being seeing as promoting any company product. But for further details, drop me a mail.
But most people would have NEVER thought about all these until it is too late to do anything. Unless, you can turn back time, of course. Even with a lump sum EPF money (which many people are dependent on, solely), it would be depleted in a matter of years if prudent post retirement money management is not practised.
Know this that every individual retirement need is different – in a sense that, it would depend on your needs and wants. That means, your financial goals, lifestyle, post retirement expenses, etc will all be major life determinants. A good analogy is – Mr A who stays in the outskirts of the city and only needs $ 2500 expenses a month will be “richer” by having $ 1 million in retirement than Mr B who stays in the heart of the city with $ 8000 expenses a month living a lavish lifestyle.
Before we wrap, below is a 13 minutes video on how a 50+ something is regretful about NOT planning for retirement in the earlier stages of life. Hint – it is NEVER too late or TOO EARLY to plan ahead.