Building asset resilience for financial immunity in retirement

By Mukesh Dhawan, Chief Executive Officer of Zurich Takaful Malaysia Berhad

2020 has been a record year for Malaysia. In July, we witnessed Bank Negara Malaysia reduce its key interest rate for a fourth straight meeting to a historic low 1.75 percent in the midst of the economy grappling with coronavirus and subdued export demand.

Since then, the central bank has maintained the Overnight Policy Rate (OPR) at 1.75 percent. Some analysts project further reduction during an upcoming Monetary Policy Committee meeting in the first quarter of 2021.

As consumers, lower OPR brings lower rates for bank loans. This means both lower repayment over the same loan period or the same repayment over a shorter period. Either way, if you are in the market for a new housing or car loan, now is a good time.

The flipside is that a lower OPR brings along lower savings and fixed deposit rates. With unattractive yields on offer, how does maximise utility value and plan for a comfortable retirement? Bear in mind some analysts project a minimum savings target of RM240,000 by retirement age. 

35 percent of Malaysian respondents in the 2019 Workforce Protection study by Zurich Insurance Group-University of Oxford of 17 countries indicated their greatest financial worry is having enough money for comfortable retirement. This is on top of 28 percent of Malaysians who do not want to burden their family and friends should something happen to them. It serves as an indicator of people’s awareness of the importance of retirement security.

In contrast, the ‘Financial Behaviour and State of Financial Well-Being of Malaysian Working Adults 2018 (AFBES18)’ report by Agensi Kaunseling dan Pengurusan Kredit (AKPK) found that 50 percent of Malaysian working adults are not financially resilient.

It is important then for consumers to re-assess savings or investment strategy to ensure the most optimal returns. Building towards financial immunity should start ideally in your mid-30s. A good starting point is determining an estimate required to retire with the lifestyle you hope to have. A simple online retirement calculator is handy to work it out. 

An attractive proposition is investment-linked insurance plans (ILPs). They are designed to overcome life’s financial uncertainties while optimising customers’ investment returns. The plans are professionally managed and can be either conventional or Shariah-approved investment funds. Whichever the option, well-managed ILPs deliver attractive returns. Such plans also offer flexible comprehensive protection for consumers to focus on achieving their life goals without worry.

In essence, ILP premiums and contributions earn customers returns in the market, global or domestic, while providing coverage on their health as well e.g. critical illness, hospitalisation and death. Some plans even include riders (additional benefits) should customers seek additional coverage. In the end, the choice is entirely up to the customer, to suit their needs at each life milestone.

A key benefit of ILPs is flexibility. Most ILPs allow customisation of portfolios or changing of premium or contribution amount to suit customer affordability. There is also the option of switching between funds within the insurance provider’s existing fund options, depending on customer risk appetite.

One aspect unique to takaful is the concept of surplus sharing. Takaful operators share contribution surplus between participants at the end of financial year based on an agreed sharing ratio. Contribution surplus arises when there is an excess of contributions after deducting all claims payable and reserves and is a form of rebate for consumers.

Subscribing to an ILP earlier allows more time to benefit from compounding returns. Compounding returns help mitigate inflation impact, which affects cost of living. The Rule of 72 is useful to approximate the number of years it takes for cost of living to double. Simply divide 72 by the inflation rate. For example, if the inflation rate is 4 percent, cost of living would double every 18 years.

Inflation rising quicker than retirement savings could signal the need to manage expenses as savings may not last throughout retirement. In other words you may outlive available savings. This holds true as life expectancy is increasing, as noted by the Department of Statistics Malaysia: males and females who reach the age of 60 are expected to live another 18 and 21 years respectively.

Generally, the older you get, a greater portion of your portfolio should focus on income and preservation of capital. This means a higher allocation in securities, such as bonds that are less volatile than stocks or shares and provide usable income you can use to live on. This is because time value of money is less concerning to someone who is retiring in three years compared to a younger professional who might have just entered the workforce.

Diversification is important in preparation for financial immunity. One’s portfolio should be rebalanced periodically as their time horizon changes. Investing in different financial asset classes is a good step to secure multiple growth sources and protection for your retirement fund. With additional earnings or savings from existing investments, these funds should be channelled to additional forms of investment opportunities that offer attractive returns.

Another tip is to split the retirement plan into multiple components. For example, say you want to retire in eight years, pay for your child’s tertiary education, and retirement. The retirement plan would be broken up into three periods: years until retirement (contributions still made), saving and paying for college, and retiring (withdrawals to cover living expenses). Integrating these various time horizons, along with the corresponding liquidity needs, is key to determine optimal portfolio allocation.

Fundamentally, one should understand the exposure they are willing to take to meet their objectives. You have to be comfortable with the risks being taken in your portfolio and distinguish between necessity and luxury. This helps with proper portfolio allocation that balances risk concerns and return objectives. Enlisting a licensed wealth or financial planner, or even a professional fund manager is also a good idea to help plan for a resilient retirement with financial immunity.


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