News & Insights

Keep up to date on current investment news.

Back

Save now to spend later - and how to do it right

Save now to spend later - and how to do it right

“I’m still young and I can afford to think about retirement later.”
“I’m not making enough money to be saving right now.”
“My EPF savings will be enough for my retirement.”

Do these responses seem familiar yet? Too many young Malaysians today still hold these misconceptions when it comes to planning for their retirement.

But consider this: in a survey conducted by the Department of Statistics during the initial Movement Control Order, the hard and brutal truth is that 60% of Malaysians on average do not have sufficient financial savings to last a month.

COVID-19 has only exacerbated this. The Schroders Global Investor Study 2021 found that 80% of retirees in Malaysia have become more cautious with spending their retirement savings in the wake of the pandemic, while all respondents wish they had saved more money for their retirement.

One thing is clear: it’s never too early to start thinking – and saving – for retirement.

The power of compounding

The idea of starting early when it comes to retirement planning is premised on the concept of accumulation, which is the phase in which you save, invest, and build up your assets for retirement.

It is here where you can harness the power of compounding – where earnings from your assets are reinvested to generate additional earnings over time. The earlier you start, the longer of a runway you have for those earnings to snowball. It is a simple advantage that comes with time. 

Take Farah, who started investing RM500 every year right as she started working in 1992. Assuming an annual interest rate of 5%, she would have grown her pot of money to RM34,880 today, in 30 years’ time. 

On the other hand, Adam, who only started investing 10 years later in 2002 (assuming all conditions are the same), would only have about RM17,360 today.

Saving early for retirement – even with a small sum at first – is always better than to not do so at all. This has become especially pertinent in recent years, as Malaysians grapple with the rising costs of living, increasing healthcare and medical expenses, inflation, and the prospect of living much longer lives. 

Doing more with less 

Most people work long and hard to save money in the hopes of kicking back in their golden years. To this end, equally important is decumulation, which comes in when you start to draw down from those savings and assets as a source of income in your retirement.

Decumulation sounds simple, but it’s not merely about spending – which can easily spiral out of control, if not done right. The key is to adopt some simple rules and ideas about making such drawdowns responsibly so that you can ensure the sustainability of your funds, rather than outlive them. Here are some conventional strategies:

  1. The 4% withdrawal rule

The rule stipulates that you take out 4% of your retirement savings in your first year of retirement, before adjusting/increasing the sum each subsequent year to keep pace with inflation.

Why it works: This strategy is simple to follow, predictable, and ensures that your buying power keeps pace with inflation.

But pay attention to this: Factors such as rising interest rates and increased volatility could deplete your funds sooner than expected. This strategy doesn’t take into account market conditions as well – where you might want to reduce your withdrawal sums during a recession instead of raising them.

  1. Fixed-dollar withdrawals

With this approach, you withdraw a fixed dollar amount over a specific time period. For example, you withdraw RM3,000 every year for the first five years of your retirement, before you reassess if this sum is adequate for the next five. 

Why it works: Like the 4% withdrawal rule, the fixed-dollar withdrawal strategy is simple to follow and offers predictability.

But pay attention to this: Fixed-dollar withdrawals come with risks of inflation and losing purchasing power. If the market is down, you may also need to draw down more. 

  1. Fixed-percentage withdrawals

Every year, you withdraw a fixed percentage from your investment portfolio. To illustrate, assuming a fixed percentage of 3.5%:

 

  Year 1 Year 2 Year 3
Investment account balance RM50,000 RM41,000 RM62,000
Retirement withdrawal sum RM1,750 RM1,435 RM2,170
 

Why it works: The sum you withdraw will vary according to the rises and falls in your account, responding naturally to market movements and fluctuations. It also ensures that your portfolio is never depleted.

But pay attention to this: Having an inconsistent annual income can make budgeting or financial planning slightly difficult. Choosing too large a percentage could also pose a risk. 

Setting a sustainable path

The big idea about retirement planning is that the work does not stop when you have saved up enough. You still need to remain disciplined and focused in the way you draw down and manage your money – perhaps still investing – in your post-work years.

There is no one right way to do retirement. It’s about finding a strategy tailored to your needs, particularly one that can allow you to address today’s modern challenges. 

Investors should be able to choose what levels of risk to take and have the flexibility to decide on how their retirement planning should fit their goals, needs, and lifestyles – so that they can live the retirement life they want without worrying about outliving their savings, even in uncertain times. Learn more about how the Maybank Flexible Retirement Solution can help.